Home Equity Line of Credit or Mortgage — pay which first?

Hi Terry,

We owe 100,000 on our home. We just took a variable rate {4.24%}Home equity line of credit for 40,000 to do some major remodeling on our home that we built 20 years ago, with the thought that 2800 sq feet is just too big at our age. When we sell, we could probably get in the mid 300,000’s…..should we just be taking equity out on our home and roll it into our mortgage, which I pay bi-monthly at 3.125 %….if we did that we would be fixed at 3.169% I believe…what if we decide to stay when our house is all updated and gorgeous. My husband is a carpenter and just started working steadily after 7 years of the collapse and I am a Nurse with about 10 years left to work…..Thanks so much.

Terry Says:  Well, this is a complicated question and I admit I’m a bit confused.   You have a small mortgage, a great low fixed rate (3.125%) and a lot of equity.  I’m assuming you felt you really needed to do the remodeling.  The rate is a bit high, so your goal should be to pay this home equity loan down as quickly as possible — and certainly before rates rise again.  Since you’re both working, you should be able to do that.   I know you are trying to accelerate the payments on your mortgage by paying bi-weekly (not bi-monthly!).  But maybe you should go back to paying once a month on the main loan, and paying down the home equity loan, which is probably only asking for small payments to cover the interest.  That’s what makes you vulnerable on the home equity loan:  interest-only payments, potential rising rates, and a balloon in a few years.  So that’s the one you need to get rid of first.  Then try to pay off the other mortgage by the time you are ready to retire.  That should be do-able with both of you working.