Best option to get rid of a LOC

[CaperOnt]

I have an LOC with over 20k on it and I want to get rid of it. I'm tired of the $800 monthly payment. It's not an unmanageable debt, but I'm sick of having it around. My wife wants to roll it into our mortgage renewal next year but I think that's a really bad idea. Short of getting a personal loan instead of keeping the LOC are there any other ways to do it? Am I wrong about rolling it into the mortgage being a bad idea?

[ns_guy]

Why are you not sure about rolling it into your mortgage on renewal? What is your current interest rate on the LOC? A personal loan will be at a higher interest rate likely, though you have the benefit of having monthly payments and not being able to "tap into the money again" - I assume you don't want to secure the loan with a second mortgage on your property to get a lower interest rate (prime +1)?

Rolling it into your mortgage allows you to take advantage of the lower interest rate than then the LOC (hopefully), and get rid of the extra monthly payment (seems like that's your primary motivation for getting rid of the LOC).

Here is a simple loan calculator; use prime+1=5% or prime+~2.5 to 3%=7.5 to 8% for the calculation.

https://www.cibc.com/ca/loans/article-tools/cibc-loan-calcu.html

Cheers

[Si98]

Why are you not sure about rolling it into your mortgage on renewal? What is your current interest rate on the LOC? A personal loan will be at a higher interest rate likely, though you have the benefit of having monthly payments and not being able to "tap into the money again" - I assume you don't want to secure the loan with a second mortgage on your property to get a lower interest rate (prime +1)?

Rolling it into your mortgage allows you to take advantage of the lower interest rate than then the LOC (hopefully), and get rid of the extra monthly payment (seems like that's your primary motivation for getting rid of the LOC).

Here is a simple loan calculator; use prime+1=5% or prime+~2.5 to 3%=7.5 to 8% for the calculation.

https://www.cibc.com/ca/loans/article-tools/cibc-loan-calcu.html

Cheers

My wife actually wants to do the opposite and borrow from our LOC and pay down our mortgage because of the lower LOC interest rate.

[StefanS]

My wife actually wants to do the opposite and borrow from our LOC and pay down our mortgage because of the lower LOC interest rate.

For this, while you would save money, it's important to note that this will negatively affect your credit score as you will be using up a much higher percentage of your available credit. Also, if you don't have many liquid assets, you might find it more difficult if you have unexpected expenses.

How big of a difference are the rates though between your mortgage and your LOC?

[Si98]

For this, while you would save money, it's important to note that this will negatively affect your credit score as you will be using up a much higher percentage of your available credit. Also, if you don't have many liquid assets, you might find it more difficult if you have unexpected expenses.

How big of a difference are the rates though between your mortgage and your LOC?

Our mortgage rate is just under 6% and our LOC is prime plus 1. My wife would do anything to save a few bucks. This route of course is temporary until its time to renew our mortgage again in a couple of years. Hopefully we can negotiate a better rate when the time comes.

[Thalo]

You have a ULOC at the same rate as what people are currently being offered for new HELOCs and you want to get rid of it? You can certainly pay it off quicker than doing the minimum payments, but low interest credit like that is hard to come by.

Yes, equivalent loans are almost always higher interest rate than ULOCs.

[CaperOnt]

For this, while you would save money, it's important to note that this will negatively affect your credit score as you will be using up a much higher percentage of your available credit. Also, if you don't have many liquid assets, you might find it more difficult if you have unexpected expenses.

How big of a difference are the rates though between your mortgage and your LOC?

Currently our mortgage is %4.06. When we renew next year it will likely be over %6. The LOC is at Prime + %2.5.

The main reason I don't want to roll it in is that I've always been told that you pay double the principle back on a mortgage...so my 24k LOC becomes 48k on my mortgage.....of course I could be wrong about that :)

[AllWheelDrift]

The debt isn't going to magically disappear.

Financially speaking, you'd probably be best rolling it into your mortgage so you get a lower rate on the debt, but at the same time you need to be aggressive in making prepayments on your mortgage otherwise all you've really done is increased the amount of time you will take to repay the debt.

If you have a hard time being disciplined enough to make those prepayments, or think you might run up a LOC again after rolling it into your mortgage you may be better off keeping the debt in the LOC as a reminder. At $800/month the $20k should be paid off in less than 3 years.

[squid]

Another option is to transfer it all (mortgage and ULOC) into a HELOC such as Can Tire's all in one. You will pay 4% (today's rate with rate cuts expected).
You will be obligated to pay only the interest charges (lower payments).
You can pay it all off at any time (greater flexibility).
Unless you are very risk adverse, why is anyone locking in at such high rates?
And why is anyone going with the banks variable at prime +1?

[CaperOnt]

I guess it's a mental block for me. Knowing that I will pay double the principle to get rid of it irks me. I guess what I really need to figure out how much interest I would pay over 5 years to pay it off (I think 3 is optimistic for me). It's prime +2.5 so it's not a great rate even with prime being this low.

[AllWheelDrift]

I guess it's a mental block for me. Knowing that I will pay double the principle to get rid of it irks me. I guess what I really need to figure out how much interest I would pay over 5 years to pay it off (I think 3 is optimistic for me). It's prime +2.5 so it's not a great rate even with prime being this low.
The "double the principle" sounds like some kind of rule of thumb to account for the fact that you'll take a lot longer to pay it off if you don't make prepayments to your mortgage. It won't suddenly become 48k when you add it to your mortgage, you'll only add 24k to your mortgage. The problem is if you "forget" about it once you roll it into your mortgage, you'll take however long you have left in your mortgage to repay it, and get stuck with that much extra interest.

[squid]

I guess it's a mental block for me. Knowing that I will pay double the principle to get rid of it irks me. I guess what I really need to figure out how much interest I would pay over 5 years to pay it off (I think 3 is optimistic for me). It's prime +2.5 so it's not a great rate even with prime being this low.

Mental Block indeed.

If you add it right now, and then pay it off in three years, you will be paying less than if you didn't add it. If however, you add it and do not take advantage of any prepayment options and pay it off over 25 years, you will of course be paying more total interest than if you pay it off in 3 years.

Is this so hard to understand?

If you look at my earlier suggestion, you will save a lot more money.

[CaperOnt]

Mental Block indeed.

If you add it right now, and then pay it off in three years, you will be paying less than if you didn't add it. If however, you add it and do not take advantage of any prepayment options and pay it off over 25 years, you will of course be paying more total interest than if you pay it off in 3 years.

Is this so hard to understand?

If you look at my earlier suggestion, you will save a lot more money.

lol - no, it's not that hard to understand....it's just counter to what I thought I should do....but that's why I asked for advice ;)

[gman]

Currently our mortgage is %4.06. When we renew next year it will likely be over %6. The LOC is at Prime + %2.5.

The main reason I don't want to roll it in is that I've always been told that you pay double the principle back on a mortgage...so my 24k LOC becomes 48k on my mortgage.....of course I could be wrong about that :)

I guess it's a mental block for me. Knowing that I will pay double the principle to get rid of it irks me. I guess what I really need to figure out how much interest I would pay over 5 years to pay it off (I think 3 is optimistic for me). It's prime +2.5 so it's not a great rate even with prime being this low.

You want to get rid of LOC. All the debt in your LOC is basically principal. If you have problem to pay double or even more to the 'principal', you may as well not to think about getting rid of the LOC.

[StefanS]

I guess it's a mental block for me. Knowing that I will pay double the principle to get rid of it irks me. I guess what I really need to figure out how much interest I would pay over 5 years to pay it off (I think 3 is optimistic for me). It's prime +2.5 so it's not a great rate even with prime being this low.

Actually, 3 isn't that optimistic at all. Here's what I've gathered so far:

-You have a 20k LOC
-You're making monthly payments of $800
-Interest rate is prime + 2.5, (6.5%) now

If you were only paying the interest on your LOC, your monthly payments would only be around $108. Since you're paying $800, you should be paying about $700 of the principal off every month. Assuming a constant interest rate of 6.5% (which is pessimistic as prime doesn't look to be increasing soon), you should have this loan paid off under 3 years. Total interest paid would be around $2,500 in my estimation (as your principal will be falling with the extra payments).

Assuming worst case scenario, that your LOC is 30k, your monthly payments would only be around $162, paying interest only. You would be paying around $650 of the principal off with an $800 monthly payment. Assuming a rate of 6.5%, the loan would be paid off around 3.5 years. Total interest paid would be around $5,500 in my estimation.