REAL MONEY Should I Prepay My Home Equity Loan?

By Thomas M. Anderson From Kiplinger’s Personal Finance magazine, December 2007 The Question: Does it make sense to sell mutual funds to prepay a home-equity loan? The Answer: Jeremiah Bodner is well on his way to a junior membership in the millionaire’s club. The 34-year-old bachelor owns a condo and two rental properties and has saved $285,000, including $100,000 in retirement accounts.

Bodner, who lives in Berlin, N.J., makes $72,000 a year as a social studies teacher and on the side runs a vending business selling hot dogs at a local flea market. “When everyone else is having fun on the weekends, I’m working my stands,” he says. Although his finances are in solid shape, Bodner can’t help fretting about a $59,000 home-equity loan, on which he’s paying a fixed rate of 8.5%.

“Making that loan payment every month seems like a waste of money,” says Bodner, who’s considering selling some of his mutual funds to pay off the debt, even if it means paying capital-gains taxes. Worried about the recent gyrations in the stock market, he’d like to eliminate the loan while lessening the possibility that his portfolio will take a big hit. But he wonders if a loan payoff would be the best use of his savings. Other options.

Bodner does have other ways to make his debt more manageable. That 8.5% rate is slightly higher than current rates for similar loans, which have been averaging 8.2%. With his good credit rating, he could probably get a lower rate by refinancing. But it usually doesn’t make sense to refinance unless you can shave at least one percentage point from your interest rate. Otherwise, the cost of refinancing will eat away at your savings on the new loan.