rai

I have a HELOC with a variable rate depending on the balance.

$50K to 100K is 4.75%
under $50K is 6%

currently I am at $52K (4.75%)

I get tax deduction but is phased out by the 3% deduction reduction rule so most of my interest deduction is lost.

On the other hand I get 3.3% interest on my cash (minus income-tax) so would that be more like 2% (post tax)

the difference between my variable is 4.75% vs 6% ( 1.25%)

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If I have $20K (as an example) would it be better to pay off the loan (trigger the higher interest rate) or would it be better to keep the cash and earn interest at net 2%? Thus I'd pay 4.75% but earn 2% would seem like 2.75% loan.

Could anyone let me know how to figure out which costs more?

I plan to pay off the HELOC in 6-8 months just don't know if it would cost me more to trigger the higher rate sooner or wait until I can pay it off all at once.

Thanks.

RedY2KS2k

I would ask one question: do you have at least 3 months' take home pay in a dull, boring, savings account?

People lose jobs, often through no fault of their own. People become disabled and unable to work. You really should have this cushion, just in case. There will be times in life when this cushion makes it easier to sleep at night.

If you have it, ignore my question and pursue the decision on what to do with the extra $20k. If not, think about my question. Don't answer to me; it's none of my business. Just think about it.

ace123

between the interest you're earning and inflation, i'd probably save against the loan instead of paying it down. even if inflation were to only run 2%, you're making 3.3% on the money, so you'd effectively net a negligible amount of money every month--assuming the variable rate doesn't increase significantly. but having cash in hand has value. and you can always write them a check.

i'd save against the debt, and when a) your situation changes, b) you save enough to pay it off, c) the interest rate jumps, d) you just feel like paying it down, just write a big check.

however, don't save against the debt if you'll be heavily inclined to take a vacation/buy car parts/etc in lieu of paying the debt off once you see your debt nest egg grow.

regardless of what you do, i certainly wouldn't worry too much about it. it sounds like the opportunity cost of making the wrong decision is on the order of 0.5% APR on a small amount of money. you could waste more money than that any weekend.

rai

I guess it's not any big savings or cost either way.

I could pay $6000 x 9 months to pay it off but that first payement kicks the interest rate up which negates the lower balance I would have.

AssassinJN

Using your sample numbers:

4.75% - 2% = 2.75% * $52,000 = $1430
$52,000 - $20,000 = $32,000 * 6% = $1920

Don't think of it as actual amounts but as a ratio. But either way you would save more by saving the money if taxes have no realistic affect.

Makes sense to just put the money in a savings account (or 6 month cd) and just wait until you can pay it all in 1 lump sum. If the minimum monthly payments (or if the rate changes) drop the amount below the 50k line, pay as much as you can.

Edit: Either way you are looking at saving a maximum of no more than $250, so don't stress too much either way.

rai

thanks

no big deal but ~$40 a month savings is still something

the minimum monthly payments won't be an issue as it's ~$200 which is about what the interest is. I'll be careful about that.

QUIKAG

Save up until you have sufficient cash and pay off the HELOC all at once.

rai

thanks that's what I'll do.