Paying Off Your Mortgage vs. Your Home Equity Loan

When it comes to paying off a home equity mortgage loan or a traditional mortgage, you will have several things to consider. If you have both a mortgage and home-equity loan, you might have difficulty deciding which one to pay off first. Here are a few things to consider about paying off one of them early.

Payment Size

One thing that you will need to consider in this debate is the size of the monthly payments associated with each loan. For many people, the main objective is to lower the amount of money being paid out on a monthly basis. If you want to create more flexibility in your monthly budget, it would make sense to pay off the loan that has the larger monthly payment. In the majority of cases, this will be your mortgage loan because it was a much larger balance at the beginning of the loan.

Interest Rate

Something else that you will need to consider is the interest rate of each loan. Most of the time, one of the interest rates is going to be higher than the other. If you want to look at it from a purely financial standpoint, it would make more sense to pay off the loan with the higher interest rate first. The higher the interest rate on the loan, the more money you are paying to the lender. This means that if you want to save as much money as possible, you will need to eliminate the highest rate that you are paying in interest.

Tax Deduction

Another factor that you need to consider is the tax deduction that you receive from the loans. Both the home-equity loan and the mortgage provide you with a tax deduction when you file your taxes. The total amount of interest that you pay for the year is allowed to be deducted from your taxable income. This can be a very substantial deduction depending on how much interest you are paying. With this in mind, you need to factor in how much of a deduction is coming from your mortgage and how much is coming from your home-equity loan. Some people may not want to pay off their mortgage because it might result in losing a substantial tax deduction.

Loan Balance

You should also take into consideration how much of a loan balance is on each loan. If you are getting close to paying off your mortgage, it might be in your best interest to go ahead and pay it off. This will eliminate a payment and allow you to then focus on the home-equity loan. However, if you are getting close to having the home-equity loan paid off, you might put more emphasis on that. If you are somewhere in the middle of the process with each loan, you need to refer to the other factors that are involved to help make your decision.

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