Would you continue to pay a home equity loan with 20k in a CD?

Question

I came into a win fall of $48,000 a few months ago, I paid off all my credit card debt and bought a small boat and still netted $20,000 which I put in a CD earning 4%. I have $25,000 in lines of credit with 2 credit cards and no balance. I still have a $18,000 home equity loan I pay, this is my only debt, the original term was 7% over 15 years. My CD matures in September and I will be lucky if I get 3% on new terms. My question is I like the safety net of the $20k in liquid able assets yet I only get about $74.00 a month in interest yet I pay $189.00 per month in my Home Equity loan. Would you take the remaining $20K and pay off the Home Equity and lose that sense of security of having $20k to back you up? Would you rely on paid off credit cards with a combined line of $25k as your safety net? Finally , if I keep the 20k in various CDs and continue to pay the Home Equity loan in about 14 years the 20k will be mine fully…. What are your opinions?

Answer 1

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Answer 2

I would look at interest rates/tax issues. One more issue:  is there any type of prepayment penalty or closing cost/penalty for closing out the Home Equity loan??

I'm assuming the interest on the home equity is deductible for tax purposes? If so, it depends on the tax bracket you're in. If ur paying 7% on the HE loan, and assuming ur in the 30-35% tax bracket, with the tax savings, the net ur paying out on the HE loan is about 4.5-5%. But ur only earning 4% on the CD. So ur paying out slightly more than ur earning on the CD, but its fairly close to being a toss-up.  So the answer  might be whatever gives you the most peace of mind.

Answer 3

Cancel your credit cards and pay off the home equity line.  That leaves you with $2,000 in your emergency fund.  Then continue to save 3-6 months of expenses in an emergency fund.