Balance Transfers

Balance Transfers

When we bought our house last summer, I ended up taking out a $16,500 Home Equity Line of Credit to satisfy the 20% down rule and eliminate any PMI charges and secure a lower rate on the 30 year fixed mortgage I was taking out. Well I’ve widdled this down to a little under $6,000 in the first year, but I’ve kind of hit a wall now. Basically last two months I haven’t been able to make anything but the minimum payment on my HELOC and well the damn interest rate keeps going up, so I am thinking about playing the balance transfer game to pay off the HELOC for at least the next 12 months go give us some breathing room and save us about $42 a month in interest charges stemming from the HELOC. On top of that technically my HELOC will owe my Roth IRA accounts about $8,000 come Jan 1, so my HELOC still has some bite in it at this point and I’d be earning interest off of some credit card companies money rather than paying the mortgage company hard earned cash each month.

Now don’t get me wrong, I’m not in dire financial straights and looking to take out a balance transfer just to help pay the bills. I could easily pay off the HELOC if I wanted to, but that means I would either have to delay/skip maxing out my and/or my wife’s Roth IRAs in 2007 or lower my 401k contribution percentage below 17.5%. Basically I’ve got about $18,000 a year that I am putting away for retirement, so I’ve got a little wiggle room if things get tight. But the point is I don’t ever want to get to the point where I need to descrease or for that matter stop increasing my retirement contributions. If some credit card company will give me free money to play with I think I’ll take them up on it.

I have no credit card debt, nor have I ever or will I ever have any credit card debt (above 0%) and really I think I’ve just strung our household income to the limit with the amount I am contributing towards retirement. Currently that $18,000 makes up 32% of our household income and every penny of that $18k is after-tax money, add in Mortgage/Heloc and we really aren’t living on much.

If anything I will just take out a balance transfer for 12 months, pay off the HELOC, and put the extra in a high-yield savings account. Keep adding to the high yield savings account throughout the year as money frees up, and then worst case scenario I wasn’t able to come up with any extra money to pay off balance transfer in entirety, I’ll just pay of the balance transfer card with the HELOC, or do another balance transfer (BTW I doubt this will be the case). No matter what it will save me the $42 a month I’m currently paying on my HELOC and any interest from the extra money. That’s still a minimum savings of $500.

Anyway MyMoneyBlog seems to be the balance transfer expert so I am reading up and learning over there. It looks like Citi is the best company to do this with, but if possible I’d like to use Chase as the rest of my accounts are with them. We’ll see and I’ll keep you posted as I go through the process.

  • Well I can think of a couple of alternatives but they depend on what interest rate you’re paying on on the HELOC.

    Alternative 1 – Why settle for 0% for 12 months when you could possibly have 3.99% forever?

    Some credt card companies like Chase & Discover are offering 3.99% for the life of the loan. If you don’t anticipate paying it off in 12 months then you’re best bet is to pay the 3.99% over a longer period – say 24 to 36 months. Of course, this becomes counterproductive if your Heloc is at 5% or so since you’re not really gaining much.

    Alternative 2 – HELOC loan interest, in theory, is tax deductable – have you calculated the benefit of this vs. not having it on credit card?

    Alternative 3 – It appears to me that you’re too top heavy into retirement accounts. If you have that much spare cash you should consider a side business (rental properties come to mind). You could then create another retirement account under that entity and shelter some more income vs. the Roth.

  • My Financial Journey

    Thanks for the ideas on the fixed rate credit card transfers, completely forgot about that option.

    Interest rate on HELOC is variable…..currently its at 8.75% and I’m in the 15% tax bracket, so I know I can do better than just leaving it as is.

    As far as side business that’s definitely crossed my mind, but that won’t happen until I get rid of the HELOC debt and start hording up more cash. I looked at rental properties pretty seriously for a while, but return vs time/money didn’t seem to do it for me at this point. Don’t know that I would consider anything other than retirement accounts until I get to the point where I am maxed at Roth 401k and both my and my wife’s Roth IRAs

    Thanks for the comments though, great advice and you definitely got me thinking about more options available to me.

  • Have you considered calling your bank and asking them if they can lower your rate and lock it in? Maybe tell them that you are considering moving the debt somewhere else cheaper.

    I agree with you that the 0% game would be nice, especially if you could pay it off in 12 months.

  • My Financial Journey

    I also haven’t considered talking to my bank, but with it only being $6k, I consider it a short-term debt that I hopefully won’t have for much more than a year or two at most so I figured it would be easier dealing with the CC companies vs the bank, especially since the bank my loan is through I have never corresponded with and just went with them because they had the lowest rate. Also despite having my main mortgage at a fixed rate most people I talked to said I couldn’t get a fixed HELOC, anyway like I said I wasn’t too concerned because I viewed this as a short term debt, but at same time if I manage it a little better I can save updwards of $500 /yr.

    Anyway thanks for the great suggestions. I’m still looking for the best route that will have the least negative consequences for my credit score and my finances.

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