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May 7 2012 12:00AM

Question

I am a widow age 64, with income of $29,000 annually. I owe $50,000 home equity loan (home valued at $120,000). I have $150,000 invested in mutual funds and would like to be debt free. Should I pay this home equity loan off or just pay as much as I can each month?

Answer

If you want to be debt free, there would typically not be a problem with paying off your equity line. If this is a Home Equity Line there should be no early payment penalty. But check just to be sure.

However paying it off at one time today, assumes that you can access your money without penalty or taxes. If you have a penalty for withdrawal of any kind or you are pulling the money from an account that would have you recognize ordinary income tax or capital gains tax, you should reevaluate the benefit. If there is a penalty or tax, it may be wise to only withdrawal money from the current account incurring as little tax as possible, then use the proceeds to pay off the Home Equity Line.

Although you prefer to be debt free, you must also look at your cash flow needs. Another option is to refinance the house over 30 years. This would both lock in your interest rate or cost and would allow for a low payment over 30 years. Since financing costs are at historic lows, this may be an opportunity to provide a reasonable cash flow and minimize your home financing costs. However you would want to be cautious on how you invested these proceeds to ensure you limited risk but were able to earn a reasonable return.

  • I would evaluate your investments to ensure they were appropriate for you needs.
  • Have a budget to ensure your income can be supported by the $29,000.
  • You may want to keep an equity line open for emergencies.
  • You may also consider a reverse mortgage now or in the future depending on your situation.
  • Finally, evaluate your medical and long term care coverage to ensure you have a way to fund those expenses if needed.

We are providing a response based on very limited data. I would not act on this answer without a more thorough evaluation of your total needs and situation. Our response is only intended to provide direction for further examination.

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