Personal Line of Credit - Use it or leave it alone?

Question

Folks, I have a $30k personal line of credit (6% variable APR) and am wondering if I should use it for anything or just let it sit there and look like I use 0% of available credit. I've had varying responses from colleagues so I'm reaching out to the experts for advice.

My first instinct is to pay off my mortgages early using the conventional method ($300/month extra principal payments). This method obviously requires me to have positive cash flow (which I do). But there are a lot of people talking about tricks like using a line of credit to pay chunks off mortgage and then use cash flow to pay off LOC. Here's what I have calculated:

1) Total interest on rental property mortgage loan will be $104k for 30 yrs. If I apply the $30k LOC to the mortgage principal, the total interest reduces by $63k to $41k total and the mortgage is paid off in 17 years.

2) If it takes me 10 years to pay back the LOC, the interest paid on the LOC will be $10k.

3) If I just make an extra $300/month principal payment, the total interest on the mortgage reduces to $47k. However, it's paid off in 15 years and I've paid nothing extra in interest on the LOC!

So in my mind, just paying extra principal beats using the LOC since I will save $4k by not using it ($10k in LOC interest minus the $6k difference in mortgage interest saved). But am I missing something? Why does this strategy seem to be popular?

I still have 15 days to close the LOC so I'm trying to make a decision before I pay anything for using it. Thanks in advance for any advice!

Thomas C. · Answer

great points @Costin I.

Costin I. · Answer

@Thomas Condon and @David Morgan There are many questions to be asked and directions to approach this and to take this for a simple answer. It depends on what Thomas goals are (are you looking to pay your mortgage the fastest or do diversify your investments in hope of generating wealth?), your options (can you pay your mortgage with extra "free" money (then switching to 6% LOC interest might not be the best)? or can you use the 6% LOC to generate at least 10% somewhere/somehow else?)  and also your risk tolerance (how much debt and at what rate do you tolerate? how much debt to income do you want/need/can carry? how much leverage do you want and are willing to risk? what strategies do you have to mitigate/avoid/transfer/share said risk?).

Maybe he wants to pay his mortgage to secure a large HELOC for property investments, thus becoming his own banker, which could be the best terms he can hope for. Me, I took it he's questioning to pay his mortgage with that LOC or not.

Thomas C. · Answer

@David Morgan I completely agree that leveraging debt vice equity is my default as well. I just see so many people jumping on this HELOC to pay mortgages trip that I'm starting to look into it and ask why they would do it. I'm going to search through what @Costin I. mentioned to see if I find an alternative I think may work better.

David Morgan · Answer

Here is my question,

If you use your LOC, you are leveraging your equity to build wealth. Don't you want to leverage debt (Other people's money)? I am reading one of Robert Kiyosaki's books and he talks about debt vs equity to obtain wealth. He leans heavily toward using debt and NOT equity.

It seems to me(and I am no expert) that just paying off the mortgage early would be something to strongly consider (option #3) and leave your LOC alone.

Thomas C. · Answer

Thanks Costin

Costin I. · Answer

@Thomas Condon Both strategies work, and both require discipline. If you can't put that money to work for you at a much higher rate of return, paying down the mortgage might be a good alternative. Or at least cutting it down till the prinicpal portion of the payment is substantially larger than the interest portion.

This is a topic often discussed on BP - search for "Velocity banking" or "pay early" to see more opinions.