Do you pay back the mortgage or Home Equity loan first?
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An individual has a $120,000 30 year mortgage at 6% fixed. This individual also has a floating rate Home Equity line of credit for $20,000. The current rate on this loan is 8.5%. Only interest payments are required on the Home Equity line. The individual has an increase in discretionary income of $500 per month. Assuming rates will stay constant, does it make more economic sense to pay down the mortgage or the Home Equity loan first?
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Solution Summary
The solution suggests several reasons why it is better to apply extra funds to one or the other loan. Some of the terms and conditions of equity lines of credit in general are discussed.
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Basically it depends upon the terms and conditions of each loan. Assuming a normal home equity line of credit arrangement and a mortgage loan arrangement, I would prefer to pay down the home equity loan first. The primary reason is that the interest rate of ...
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