Payoff Student Loans with HELOC?
I asked this of a finance guru about 18 months ago and he told me not to
do it. That converting "good debt" into a HELOC is a bad idea. Since
then I've managed to come into a small chunk of cash and think possibly
that perhaps now might be the time to do this:
Here's my situation in a nutshell:
Married, 2 very young kids. I have a great job and am confident that I
will not lose it anytime soon. My wife did have a great job too, but 2
years ago stopped working to stay at home with the kids. It was real
tough for us financially the first year and I was biting my nails every
day it seemed. But we have done well and have not gone into any debt
since then. We're still living "paycheck to paycheck" in terms of not
being able to save any more, and my wife and I have student loans that
it seems will never be paid off.
Student loans (combined) = $15000, hers at 9% and mine at 8.5% - we
consolidated these loans about 6 or 7 years ago, so we can't consolidate
them again I was told. Apparently the fed doesn't allow consolidation
more than once. What a scam. Hopefully someone tells me I'm wrong on this.
We own our home. It is a modest home that we purchased 4 years ago,
right before we both got pretty big raises at our jobs. Had we not
purchased the house prior to getting these large raises we surely would
have spent much more on a bigger house, and then my wife would not have
been able to stay home with the kids now. So although our goal is to get
a bigger house in a few years when the kids are in school, we're happy
with where we're at for now. Also, and more importantly for this
discussion, I owe $135 on the house with 23 years left to pay, and it
would sell at $235 (not counting realtor fees/closing costs). I am
positive of the price because this is a townhouse and I keep track of
all the neighbor sales. The neighborhood is excellent and we lucked into
this appreciation I guess. The low interest rates didn't hurt either.
We opened a HELOC about 2 years ago to pay for a new heating/cooling
system. We owe $4600.
We have no credit card debt. We have 2 vehicles, late model hondas, and
owe about $8000 apiece on them.
We now have 6 months' worth of liquid assets available in the event I
was unable to work and we no longer had any income. Unless my arms and
legs fall off, I'd find some work immediately waiting tables if I had to
to keep *some* income coming in in order to stretch this out further. So
I am now comfortable with our emergency cash on hand (in a money market
account). This cash came from our savings prior to having kids (about
half the money), and the rest I just came into via an unexpected job
bonus. Before I was content just moving along as we were until the kids
were in school. But now with the emergency fund covered, I think I'd
like to start making some financial headway and here is what I was thinking:
Pay off the high-interest student loans with the HELOC. That would bring
the HELOC to be about $20000 total. Then take the amounts I would have
had to pay each month to the student loans ($260 per month combined) and
put that towards the HELOC via an automatic debit transaction each month.
My rationale for this is, even though I want to maximize the equity in
my current home for when we plan to sell in 3 to 5 years and move to a
bigger home, I am afraid that we are not going to be out from under
these student loans for another 10 years at the current pace. Since I am
confident my house will remain close to its current value, paying off
the student loans with the HELOC seems to be a smart move.
Any advice? If I'm leaving out any important/necessary info, please let
me know.
- There is your answer. Use you cash to pay off the student loan.
That student loan is expensive at 8.75%, and I doubt you are
getting much for this cash.
If you have an emergency, use your credit card for small items
that you can pay off in a