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The King
06-24-2005, 02:29 PM
Whats up?

OpIv37
06-24-2005, 02:43 PM
alright you work at a bank so I figured you may know how to answer this question.

We have a home equity line of credit as a second mortgage to avoid PMI when we bought our home. It's interest only. The way the line of credit works though, is that if we pay the principle down, then we can borrow again up to the total amount (for example, if it were a $10,000 line of credit and we made a $2000 payment against the priniciple, we would be able to use that $2000 kind of like a credit card whenever we wanted).

A friend of mine is in the same situation with the purchase of his house. He wants to take all of his money out of savings and use it to pay down as much of the line of credit as he can. His logic is this: the interest earned from having the money in savings is LESS than the interest he pays on the line of credit, so in the long run he'll come out ahead. If he needs the money in his savings, he can always get a cash advance through the line of credit.

Does this make sense? Is it risky or are there any adverse consequences you could see from doing this? Let me know if you need more explanation- it's a bit complicated.

Thanks,

The King
06-24-2005, 02:48 PM
Yea it does make sense. Its something we will see more and more as prime rate continues to rise. This was something I faced a lot like 4 years ago. When prime was at about 5.5% and people where averaging 2-3% on investments. So equities were at a low. Then prime dropped to the low 4's and it wasnt an issue, now we are starting to see it again. If your friend has a lot of cash on hand it isnt a terrible move. Unfortunately most people are not in that situation.

Another factor is most time some of the interest you pay on an equity is tax deductable.

The King
06-24-2005, 02:49 PM
I can crunch #'s for you if you want. Home Equities are one of my products.

OpIv37
06-24-2005, 02:57 PM
I can crunch #'s for you if you want. Home Equities are one of my products.
I might take you up on that- thanks for the advice.

Dora The Explorer
06-24-2005, 03:07 PM
deffenly

clumping platelets
06-25-2005, 04:46 AM
I'll need a mortgage come March :pray: