Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

04/30/2008
Lowering the Percentage Rate of a Line of Credit Loan.
I have a loan that I took out thatís called a line of credit, in the amount of $18,000 to pay for a roof. Iíve been paying on it a year and itís only gone down a couple of hundred dollars. At this rate [fixed 8.95% rate for 20 years], Iíll be paying on it forever, and Iím already in my 60ís. Should I go ahead and get the money from another source with a lower rate and just pay it off?
Connie K. Marmet:
expert info »
There are several factors to consider in deciding whether to pay it off:

1) Do you have the cash to do so? If so, what rate of return do you receive [on that cash]? If you are earning less than 8.95%, it may make sense to pay it off. It's not clear if the line of credit is secured by your home. If it is, you need to consider the tax impact of paying it off. If it's not and you don't pay it off, converting the line to one that is tax deductible should be considered.

2) If you have a mortgage on your home, you may want to consider refinancing it and consolidating the $18,000 into the new loan. New versus existing [interest] rates, cost to refinance, and availability of credit are things to consider.

3) Another option would be to pay more than the required minimum, thus accelerating the repayment of the $18,000 and reducing the total amount of interest you will pay. [See Joan Koonceís answer about paying more towards the principal and letting the lender know that the extra money should go to the principal only.]

Note: There are two types of lines of credit--secured and unsecured. If the loan is secured by your home the interest on the loan is generally tax deductible. If it's an unsecured line of credit, it is not deductible.
Shauna L. Roberts:
expert info »
You took a 20-year term, so it will be paid off in 19 years. If your goal is to pay off that loan faster, you would have to refinance to a shorter term, which is going to increase your monthly payment. You could put extra money on the principal of that loan to pay it off sooner, but you would want to check with your lender to make sure you don't have a prepayment penalty fee.
Joan Koonce, Ph.D:
expert info »
If you can get a loan with a lower interest rate, then I would recommend doing so unless the new loan has a lot of up-front costs. If you can't get a better interest rate and your current loan is a simple-interest loan, then I would suggest paying more toward the principal each time you make payment. Make sure the lender knows that the extra money should go toward the principal only.
Sharon P. Hardy, CFE:
expert info »
I really don't know whether you have already identified a readily available "another source" where the interest rate would be lower than what you are currently paying and the duration of the debt would be drastically shortened if you decided to use it. But if this is the case, my natural inclination would be to say to you, "go for it". If not and if there is any possibility of significantly reducing the debt by a) doubling up on payments on a monthly basis, b) making the payment on a bi-weekly basis instead of monthly, or c) simply making a concerted effort, as often as possible, to increase the dollar amount of the payment when it is remitted, these are some the choices that I would take into consideration.
Rebecca Schreiber CFPģ:
expert info »
If you were to pay off your roof, where would the money come from? If it would come from a retirement account, then keep paying on your line of credit and leave your retirement accounts be. If you have just come into an inheritance or some sort of windfall and you already have 3-6 months of cash saved in an emergency fund, then pay off the roof. Be advised, though, that the payments you are making on your roof are tax deductible, while any other debt you may have, such as car loans or credit card debt are not. You may also want to consider refinancing the line of credit to a home equity loan with a lower interest rate. Whatever you choose, don't touch those retirement accounts!
Gail Rosen, CPA:
expert info »
That depends. This rate is fixed and it sounds like it is mortgage that is secured by your residence. If that is so, then the interest is tax deductible, which makes the rate a little lower, since you get back some of the money you paid by paying lower taxes, as this interest is a tax deduction. Therefore, you have to evaluate if a lower rate loan that you may be offered now is tax deductible (whether it is a mortgage) and if the rate is fixed.
Jane Callahan:
expert info »
I believe you would be much better off refinancing that loan and paying it off. You should be able to get a much lower rate than your current rate.
Michael A. Masiello:
expert info »
The [interest rate on the] LOC [line of credit] seems high. You should look at home equity or refinance as options. If you have the money in a lower rate account/savings etc. [itís] probably an ok idea to use [it] to get out of debt.
Editor's Note:
According to the Federal Reserve Board, a home equity line of credit is a form of revolving credit in which your home serves as collateral. http://www.federalreserve.gov/pubs/equity/equity_english.htm Depending on your specific situation--you may be allowed to deduct the interest because the debt is secured by your home.
For information on when an interest expense is tax deductible and when itís not, see Internal Revenue Service (IRS) Tax Topic 505 (Interest Expense) at http://www.irs.gov/taxtopics/tc505.html. To deduct interest you paid on a debt, you must itemize your tax deductions. Home mortgage interest is deductible. You cannot deduct personal interest, which includes such things as interest on a loan to purchase a car for personal use and credit card and installment interest incurred for personal expenses.]
 

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