Author Topic: Pay off low interest adjustable debt, or invest?  (Read 1377 times)

Villanelle

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Pay off low interest adjustable debt, or invest?
« on: March 29, 2016, 03:57:25 PM »
We paid off our traditional mortgage a couple years ago.  My parents lent us most of the money and we now have basically a mortgage with them, with set payments and interest.

Our total mortgage pay off was somewhat more than they had in sources they were willing to tap (didn't want to liquify certain investments), so we paid off the rest with our HELOC.   We have about $18k of that left to pay off.  It's adjustable and interest only, though we've been paying a lot of principal--about $40k in 2 years.  It was at 2.66% but recently went up to 2.8.  Still a great rate, of course, and if it were fixed, I'd never pay it off.  But the "adjustable" has always made me nervous, so it was a priority to pay it off, but now I'm rethinking.

We are doing a big overhaul of our finances, just cleaning things up.  That involved closing an old investment (non-retirement) account in a super expensive fund that has just been sitting.  I now have that money, and was about to dump it into a Vanguard fund, when I realized that I could pay off most of the HELOC with it, and have the whole thing gone within a few months, or certainly by year end. 

I know the "mortgage v invest" argument has been done to death.  But what about for an adjustable debt?  Would you pay off or invest in this situation? 

randymarsh

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Re: Pay off low interest adjustable debt, or invest?
« Reply #1 on: March 29, 2016, 04:16:31 PM »
Just a guess, but I don't think rates are going to rise much over the next year. If rates do jump like crazy, you could always pull the money out of investment and pay it off. Until then though, you benefit from having it invested.

Is there an option to covert it to a fixed rate? I think I remember my parents having a HELOC and their bank sent them something in the mail asking if they wanted to lock in their rate.

forummm

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Re: Pay off low interest adjustable debt, or invest?
« Reply #2 on: March 29, 2016, 04:18:17 PM »
Invest. Interest rates will stay low for quite awhile. And $18k isn't too much to handle and pay off if rates do increase a lot.

MoonShadow

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Re: Pay off low interest adjustable debt, or invest?
« Reply #3 on: March 29, 2016, 04:24:23 PM »
I agree with above posters.  Invest the money, but keep it in fairly liquid investments in case rates shoot for the moon for some reason.  There could be a default rate clause (and there probably is) that could be triggered by reasons you would not expect, such as an unexpected lay off.  While you are likely in a position that you wouldn't care about a lay off, it could trigger quite the increase in the interest rate.  I'd keep it invested in the same manner that I keep my emergency funds invested, in a balanced fund that can be liquidated within a week or so, should personal finance conditions suddenly change.

Villanelle

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Re: Pay off low interest adjustable debt, or invest?
« Reply #4 on: March 29, 2016, 04:30:11 PM »
Just a guess, but I don't think rates are going to rise much over the next year. If rates do jump like crazy, you could always pull the money out of investment and pay it off. Until then though, you benefit from having it invested.

Is there an option to covert it to a fixed rate? I think I remember my parents having a HELOC and their bank sent them something in the mail asking if they wanted to lock in their rate.

We could convert it (all or part), but that rate is well in to the 5% range or maybe even 6% by now.

I'll go forward with my original plan to invest.  Thanks for the sanity check, all!