Paying Off Debt Question(s)
One of the big themes for prepping financially for whatever is coming is getting out of debt. I am all for that.
I have a specific question I’m wrestling with, and am hoping to get others’ thoughts and insights to help me decide how to proceed. But I am making this overall topic more general, so if others have questions they want help with, they could bring them up under this topic as well.
Ok, so here’s my situation. I am trying to pay off a home equity loan as quickly as possible. Originally I had a high payment and was paying it off very aggressively; it would have been paid off in only a couple of years. But I hit an uncertain job situation and did not know if I would be able to continue to make that high payment consistently over the remaining duration of the loan. Given that, and the fact that interest rates were low at that time (so I knew I had an opportunity to refinance at favorable rates that might not be available later), I refinanced the home equity loan for a much longer period of time, to minimize my monthly obligation in case I lost my job.
Currently (since then), my job seems more stable, but you never know what the future may bring. So while I’d like to refinance my loan to a higher payment to pay off in a couple of years again, I am concerned about doing so, in case I once again find myself in a situation where my monthly income becomes unstable. And interest rates could be less favorable in the future if I wanted to refinance then if that happened.
So the alternative solution I’ve selected is to save aggressively toward paying off the loan early. I don’t actually pay this additional amount on the loan, though, I save the money in my credit union savings account. The reason I do that is for added flexibility; this temporarily gives me more savings-on-hand in case something comes up in the interim that requires more emergency savings than I have now.
So here’s the first part of the question(s) I’m wrestling with now: Is it safe to be saving that money towards paying off my loan in a credit union? I’m in the US. With all that we hear happening in other countries, with bank savings getting frozen and people’s savings getting a “haircut”, I am concerned about exposing this savings to that kind of risk here.
The other half of my question is about the viability/wisdom of an alternative option I’m considering. I could take a loan against my work’s retirement savings (which I cannot withdraw until I retire, but can take a loan against), and totally pay off my home equity loan. Then, instead of saving every pay-period in my credit union towards paying off that home equity loan, I have a payment deducted from my paycheck. I could have it paid off in ~2 year at the rate I am saving now. The benefit is that my house would no longer be at risk (no longer collateral), and that my retirement savings that is locked up in dollar-based assets is at least doing some good. But the risk is that if I lose my job, I may have to pay tax on the amount I withdrew (I can save enough to cover that), and they could lock up the remainder of the retirement savings until I pay off the remainder of the loan. Which matters if savings in dollars mean something anymore, but doesn’t if they don’t. But I would own my home clear.
Any thoughts or insights from others on which may be the better alternative? Or something I may not be considering risk-wise? Or maybe it is just 6 of one, and half a dozen of another risk-wise, and there isn’t a knowable “better alternative”.
Thanks in advance for your thoughts and insights,
I don't have any good answers except 'it depends.' ;^) There are a number of considerations, however.
Its partially a matter of competing interest rates. Which type of loan has the lowest rate and how much lower?
Your home equity loan is tax deductible, the credit union loan probably isn't.
My biggest concern would be the retirement fund. What is it invested in? The luckiest move I ever made was taking all my 401K money out of the stock market in January 2007. The worst move I ever made was not having money in stocks for the tripling of the S&P since March 2009. Of course, when you take money out of stocks you will probably get squat for interest on that money.
I think, all else being equal, I would be stashing money in an emergency fund in cash outside any tax deferred account. If we go into another recession as many expect, cash will be king.
…for all the good info to chew on. The interest rate on my current home equity loan is pretty low…I'm thinking around 4% fixed, but I may be off a little. The rate I'd have on a loan on my retirement savings would be even a lower fixed rate, 'cuz interest rates have gone down even further.
But you know, what you are saying about building up an emergency fund in cash outside of the tax deferred account makes sense (I didn't even think about the deflation/cash-is-king aspect of the situation; doh!). If I go that route, I should still have enough to pay off my home equity loan off in ~2 years, if things hold together (fingers crossed).
Thanks again, Doug; I really appreciate getting your added perspective!