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Question for the Money Doctors

Question submitted on Jul 21, 2013.

Question

I am inquiring about a home equity line of credit. I bought my own house for $154,900 about 1.5 years ago. The interest rate is locked in for 30 years at 4.25%. The current balance on my loan is approximately $146,200.

I have approximately $20,000 in student loan debt for my 4 year degree. These loans are borrowed at 5.5% (subsidized) and 6.5% (unsubsidized).

Would it be wise for me to take out a home equity line of credit to pay off these student loans since they''re borrowed at a higher rate of interest than my home? (4.25%-mtg VS 5.5-6.5%-student loans). I have great credit (roughly 750 and a local credit union is offering 2.43% +/- prime.

Thank you,

Mikel

Answer

Hi Mikel,

Let’s go over the pros and cons of paying off your student loans with a home equity line of credit (HELOC). Of course, the benefit is to pay less in interest. Assuming most of your loans are at 6.5%, you’d save up to $450 per year. There are a few pitfalls to consider. First, student loan interest and mortgage interest are both deductible in your situation, but at different locations on your tax return. Therefore, there is a slight possibility that the student loan interest gets you a greater tax benefit than the mortgage interest. So, find out by running a projection under both scenarios. Second, rising interest rates could push your HELOC interest above your student loan interest. Therefore, consider your repayment time-frame.The longer your time-frame, the greater the risk might be.Lastly, in case of default, the HELOC can put your home at risk. So, evaluate how secure your situation is (savings, job stability, re-employment prospect in case of job loss, etc.)&ampnbsp One you evaluate the potential downside, ask yourself if it is worth the expected savings. Either way, determine a disciplined repayment plan to repay money borrowed for education within a reasonable time-frame.


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