Shedding debt quickly can be beneficial, but you may not need to rush your home equity loan payoff.
Key points
- Any time you pay off debt ahead of schedule, you save money on interest.
- You’re better off focusing your efforts on paying off debt with variable interest first.
Since home values have been up substantially over the past few years, many consumers have capitalized on it by borrowing against their homes. And so if you have an outstanding home equity loan, you’re no doubt in good company.
New York Life’s latest Wealth Watch survey found that 22% of consumers owe money on a mortgage or home equity loan. And while you may not be in a position to pay off your home early, paying off your home equity loan ahead of schedule is another story.
But should you push yourself to get ahead of your home equity loan payment schedule? Or are you okay to pay off that loan over time as you initially planned to?
Discover: These personal loans are best for debt consolidation
More: Prequalify for a personal loan without impacting your credit score
Don’t stress that home equity loan
Paying off any type of debt early can be a good thing. That’s because the sooner you pay off your debt, the less you end up spending on interest.
But if you’re going to focus your efforts on paying off debt, you should really focus on debts with a variable interest rate, like credit card balances and HELOCs (home equity lines of credit). That’s because these debts could cost you more in interest over time.
On the other hand, home equity loans, like personal loans, offer the benefit of fixed interest rates. So let’s say you’re making a $200 monthly home equity loan payment now, and it fits into your budget just fine. If you happen to have no other debt other than a mortgage, and you have extra money, then sure, pay off that home equity loan.
But let’s say you owe $200 a month on your home equity loan and you’re also juggling a few credit card balances. Those credit cards are worth tackling first, because the interest rate on your cards has the potential to rise over time, thereby resulting in even more interest charges for you. Your home equity loan payments, meanwhile, are not going to grow beyond $200 a month, so they shouldn’t take priority over the credit cards.
Along these lines, if you can afford your home equity loan payments, there’s no need to put undue stress on yourself to pay off your loan ahead of schedule. This especially holds true if you managed to lock in a competitive interest rate on your home equity loan.
Not such a terrible kind of debt to have
If you’re someone who just plain doesn’t like being in debt, then you may be motivated to pay off your home equity loan as soon as you can. But if you’re managing your payments just fine and your loan’s interest rate isn’t outrageous, then you probably don’t need to go to the extreme of slashing all non-essential spending to get that loan paid off a bit sooner.
Saving money on interest is a nice thing — and it’s what motivates some people to pay off their mortgages ahead of schedule. But just as mortgage debt won’t necessarily be detrimental to your finances, so too might an affordable home equity loan be a perfectly okay thing to carry with you for a few more years.
