Should I pay off my mortgage with an equity line?

mortgagesWith equity line rates lower than mortgage rates, some readers are wondering if it would be better to pay off their mortgage using their equity line. In some cases that might be true, especially since I expect interest rates to stay low for at least a year. But, if you do decide to use this strategy, be ready to jump back into a fixed rate loan when interest rates start to go back up.

Here's a good question on the topic by one of our readers:

My husband is 72 and I'm 66. We have $69,000.00 left on a mortgage with 8.5% interest and a home equity loan with $95,000.00 available with a very, very low interest rate. Our home is worth (on a good day) about $850,000.00. Is it wise for us to pay off the mortgage with the home equity loan? Is interest on the home equity loan tax deductible?
We took out the mortgage to help out a daughter buy a house only to have the husband run off leaving us with the mortgage to deal with. Barbara

Barbara, sorry to hear you're stuck with debt, but in your case based on the information you've given me it would be a good idea to pay off the 8.5% mortgage loan with a low interest equity line. That way you could avoid the costs of refinancing the 8.5% mortgage. Home equity loan interest is tax deductible in most cases up to the value of the home. But, do keep your eye on interest rates. If you do see them creeping up before you are near to paying off that debt, then think about applying for a fixed-rate loan.

If you are considering paying off a high-interest mortgage with a low-interest equity line, here are some things you should review first:

1. How much interest are you actually paying on your mortgage? You pay a large portion of the interest on an amortized loan like a mortgage during the first half of the loan. As you get nearer to the end of the loan, you may be paying primarily principal. So compare your anticipated monthly interest costs of the equity line with the monthly interest costs of your current mortgage. If you don't get a monthly statement showing the amount you are paying toward principal and the amount your are paying toward interest, ask your bank for the breakdown.2. Does your equity line or loan have a fixed or variable rate? Most equity lines have variable rates. So, while rates are very low right now, don't expect the Federal Reserve to leave the rates this low for long. You can probably count on about one year at most before you'll see the Fed start raising rates.

3. Would it make sense to lock in a low fixed rate mortgage rather than use an equity line? While equity line rates look low right now they won't be for long. A fixed rate for 15 to 30 years will look a lot better in a year or two as interest rates creep back up. You probably won't see 4.5% to 4.75% fixed-rate loans for long. So if you do have a sizable mortgage debt, you probably would be better off locking in a fixed rate.

Lita Epstein has written more than 25 books including the "Complete Idiot's Guide to Improving Your Credit Score."

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