Do I add my HELO to Snowball or is this considered "House"?
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  1. #1
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    Default Do I add my HELO to Snowball or is this considered "House"?

    Good Afternoon, the only debt my Husband and I have is our HELO (Home Equity Line of Credit). For the past few years we have been taking $32,000 from our HELO and dumping it lumpsum on the Mortgage to get Mortgage paid off faster. Our HELO is 2.8% and our Mortgage was 3.5%, (We had a max allowable yearly extra payment on mortgage of $32,000). So now the mortgage is technically paid off, but we owe $130,000 on the HELO which is up for renewal Nov. 2017. My question is do I keep the $130,000 in our Debt Snowball or does this count as the "House" and we should move on to step #3 & #4, and put everything after savings onto the HELO. We have no children, are in our 40's - Home is worth approx. $375,000.
    We have $5,000 available every month after expenses, if we continue to put the $5,000 on the HELO we will have it paid before the renewal, any thoughts?

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    Registered User Ayanka's Avatar
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    You seem to come from a Dave Ramsey perspective? I don't honestly know the answer from that one. But what I would do is have a good look at your retirement and the numbers there and then decide to make a balance between the heloc and retirement. And I would definately get a full funded emergency fund first. So for me it would be 6-8 months of expenses minimum, then split between sinking funds for replacements, retirement and the heloc.

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    Registered User CookieLee's Avatar
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    I'm a big advocate of having the house paid off. However, with your numbers it won't be long for you to get 3 months of expenses in your emergency fund and you can easily put that 15% into a retirement fund which, at your age, is vital. I recommend you shop around for another mortgage early as your re-negotiation date draws closer.

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    Registered User ilovechocolate's Avatar
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    Fund your retirement accounts and your emergency account (anywhere from 3-8 months' worth of expenses). Everything else comes after that.

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    A HELOC isn't a mortgage, so that seems to answer itself. Whether or not you follow Ramsey's steps to the letter is something else you'll have to determine yourself.

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    Registered User CookieLee's Avatar
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    Actually, the HELOC is a mortgage. At this point it is their first mortgage. The house guarantees the loan. If they default, they could lose the house.

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    Banks don't consider a HELOC a mortgage. We just went through this when we were looking at buying a second house. Yes, the house secures the loan but it's a different product.

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    Quote Originally Posted by CookieLee View Post
    Actually, the HELOC is a mortgage. At this point it is their first mortgage. The house guarantees the loan. If they default, they could lose the house.
    They used the HELOC to pay off their mortgage, as said in the OP. Just because the house secures the loan does not make it a mortgage. Does Ramsey consider them one and the same? That I can't answer.

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    Regardless, it's a debt.

    My opinion is to save 3-6 months of expenses, then pay towards the HELOC.

    Once you get into the spring/summer of 2017, I'd look at the balance and maybe consider going all in provided your employment prospects are good and nothing has derailed your plans.

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    Quote Originally Posted by Russ View Post
    Regardless, it's a debt.
    Well, that I agree with. I was under the impression OP was asking because Ramsey looks at debt and the mortgage as two separate steps in his plan. Categorizing the HELOC as a mortgage means the final step. Including it in the debt category means step 3 (I think).

    I would also have the emergency fund first, and then the debt later. However, I didn't follow his steps exactly, so I'm probably not the best example of Ramsey Baby Steps.

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    My question is do I keep the $130,000 in our Debt Snowball or does this count as the "House" and we should move on to step #3 & #4, and put everything after savings onto the HELO. We have no children, are in our 40's - Home is worth approx. $375,000.
    We have $5,000 available every month after expenses, if we continue to put the $5,000 on the HELO we will have it paid before the renewal, any thoughts?
    Well, no kids, no need to leave a legacy - so your goal is probably to spend as you go? But, from a wealth-building perspective, you are leaving massive amounts of capital on the table. Here's what we do (did). I'd put a $300,000, 30 yr, 4% fixed rate mortgage on the house. ($1432/m). Use $130k of the $300k to clear the HELOC, and put the remaining $270,000 into a SP500 Index Fund at a no-load fund company. That should grow to about $6,000,000 in 30 years. After paying the $1432/m your would be free to spend the rest of the $5000/m on fun stuff, on college educations for relatives, etc - or invest it if you're so inclined.

    I see that you are well into the DR plans - but remember, the plans are directed at young super-spending "I want it now" folks that are stuck in 20% credit card debt, 20% new-car loans, $100k student loans - that's not you. Your're in the high earner, acquired wisdom, wealth-building group.

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    Registered User CookieLee's Avatar
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    My point was, "If something happens they could lose the house." Being mortgage-free means the house isn't at risk and that includes a HELOC.

    As for borrowing your way out of debt, that doesn't work. I wouldn't borrow against my house just to make an investment.

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    I would NOT pay off the HELOC before investing. How much do you have saved for retirement?

    I would take the extra $5k a month and invest - use tax advantaged accounts first.

    Building wealth at your age is of paramount importance!

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    My guess is since they are following the Dave Ramsey method, based on the steps comment, they are already investing.

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    Quote Originally Posted by Russ View Post
    My guess is since they are following the Dave Ramsey method, based on the steps comment, they are already investing.
    Hopefully you are correct and that is awesome. Then, I think the extra $5k should be invested within their investment structure. I would max the 401k's with $36k, $11k ROTHs, max an HSA if you have one available and then put the rest into after tax mutual funds thru a low cost company (Vanguard, Fidelity, etc).

    That HELOC interest is low and tax deductible. Don't waste that money!!

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