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Question for the Money Doctors

Question submitted on Jan 30, 2012.

Question

My father in law has a line of credit at 1.5 % interest. My mortgage is at 6.25%. He''s offered to pay off the morthgage and I could just make payments on the line of credit. Can you see pro''s and con''s in this arrangement. Tax implications, etc...

Answer

I do not recommend that. The mortgage is a long term requirement. The line of credit is short term financing. It is possible and some think likely that we could have very high short term interest rates in the near future. In the 1970''s, short term interest rates approached 20%. Imagine if the interest rate on your father in law''s line of credit was 20% and you were paying on that. Ouch. (If you decide to go this route, make sure that the loan from your father in law is secured by a mortgage on your residence so that you can write off the interest for tax purposes.

You have a very high interest rate. A better suggestion is that your father in law could help you restructure the loan by assisting you in the refinance of your mortgage. You should be able to get the rate down to near 4%. Your father in law may have to acquire a small percentage ownership in your residence.

I recommend that you seek the advice of a CPA personal financial planner to help you sort through this decision.


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