High Loan Interest and Low Savings Interest
Question: Dear Luise: I have about 25,000 in a Money Market CD that is collecting about 5.3%. I owe about 29000 on a home equity line of credit. I believe it is at about 7% right now. I am thinking of taking the money from my CD and paying down that line of credit, to cut down my monthly payment. Would this be a wise thing to do? J.
Answer: Dear J.: Some people are afraid to do what you are considering because they leave themselves without any liquid assets. I, for one, don’t see any sense at all is paying out high interest while earning low interest. What I do is have an open, secured line of credit at my bank for the purpose of liquidity and when I use it, I repay it in full as soon as possible.
I wouldn’t lower my payment, however. I would pay my second down to $4,000. and then I’d keep right on making the same payment every month to retire it entirely.
As soon as it was paid in full, I would take the same amount of money, monthly, to rebuild my liquid assets via CDs. I would also pay something extra every month on the principle on my first mortgage. That’s another way to offset higher interest.
Many people see forfeiting their home equity through getting a second mortgage as a way to borrow from themselves. That’s true to a degree but it often becomes a habit and the house never gets paid off. Come retirement, living rent-free or being able to sell and have the money to support the necessary changes in lifestyle can make the “golden years” a lot more comfortable. Blessings, Luise
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