Hi everyone, I’m planning to sell our home next year to buy a new one. Our current home has been a construction project for the last 8 years, and we have an $80k secured line of credit (LOC) against it at 7.15%.
We still owe $540k on the mortgage (at 4.95% variable). It’s been a rollercoaster with the variable rate since 2021, and things got tough at times. We’ve been adding extra money to the mortgage to stay on track with the 17-year amortization. The rates have dropped a bit, so we’ve kept the same payments to pay down principal. I’m hoping to get some advice on the best course of action in our situation. We want to build as much equity as possible for our next home, but we still owe money to the bank on both the LOC and the mortgage.
LOC = $300 bi-weekly, monthly interest is $500. It feels like we’re spinning our wheels.
Mortgage = $1700 bi-weekly, $1100 is interest.
Both scenarios feel less than ideal. We had 20% down when we purchased, and it doesn’t seem like we’re making much progress. Thanks!
This seems like a tough situation. You purchased a fixer-upper with 20% down and a variable rate, and added a LOC. So, it looks like you don’t have much equity yet. Am I right? Do you have enough income to pay both loans? Maybe you can make interest-only payments on the LOC, which is common with a HELOC.
@Sam
Yes, the house was a fixer-upper in 2017. It’s in good shape now, and we’re happy with it. We refinanced in 2021 to free up cash for more renovations. Based on the assessment from 2021, we have around $340k in equity (after subtracting the $80k LOC, it’s $260k in actual equity). I really want to pay down the principal, but I’m wondering if the LOC should be the priority now. We’re losing a lot to interest on both the mortgage and LOC.
@Tatum
Got it. Both the mortgage and LOC are important to focus on. I personally recommend putting a larger chunk down for the next purchase. My first property had 25% down, and now I’m debt-free. But, I’ll need to think about this more. Can you provide more details?
@Sam
I have around $600/month to spend. Right now, I’m putting it towards the mortgage to pay off extra principal. With the interest rates going down, I could shift the extra payment to the LOC ($1200/month, of which $500 is interest). That would make my mortgage payment $2800/month ($1100 is interest). Right now, I’m paying $3400/month, with $1100 going to interest.
@Tatum
I’m leaning towards paying more toward the principal of the mortgage, which is what you’re doing. But without knowing the detailed terms of your LOC, this seems like the best option for now. Next time, more down payment, agreed?
In general, you should pay extra towards the higher-interest loan, which in this case would be the LOC. Is the payment currently interest-only, or does it include principal? If it’s interest-only, when will the payment switch to include principal?
@Phoenix
They charge the interest monthly. So, I pay down $600 on the LOC, and at the end of the month, they take their $500. Essentially, I’m only paying down $100 of principal each month, which is frustrating.
