Consolidate Payments Into A Home Equity Line

If we have equity line of credit is it better to payoff 2 car payments instead of paying 3 different interest rates?


1 Answer

This is a much debated topic considering the oncoming wave of " mortgage acceleration" products.

Unfortunately, the classic answer of "it depends" applies here as it does to many aspects of financial services.

The line of credit is likely simple interest, meaning, as you pay it down, the minimum payment will decrease, allowing you to pay more and more off each month. If the interest rates are the same and you are planning on having the same monthly outflow, paying everything through your line of credit will save you money AND potentially add to your tax deduction.

This is one of the driving principles behind mortgage acceleration: put all your debt on the line of credit and then use it as a checking account. If the line of credit is used religiously in this way, you will come out ahead.

There is a pitfall though. The line of credit will carry an inherently lower payment. If you only make that minimum payment, you will simply tread water with your auto payments and never pay them down.

So here is the short answer: If you are planning on paying the same total amount each month, the line of credit would be the way to go as long as the interest rates on all the loans in question are relatively similar. In addition, used wisely, the line of credit will provide more financial flexibility and possible tax savings.