Time to Pay It Off

Janet has $20,000 on a home equity line of credit. She could pay it off from her IRA funds. There's $400,000 in the IRA, and the home is worth $500,000. Dave helps her work some numbers before giving his call.

QUESTION: Janet in New York has $20,000 on a home equity line of credit, and it’s the only debt she has. She could pay it off from her IRA funds. Janet is retired. She's earning 10–12 % on the IRA. There’s $400,000 in the IRA, and the home is worth $500,000. Dave helps her work some numbers before giving his call.

ANSWER: You’ve done a great job, and you are very bright with math. Based on your logic, there’s no reason to not borrow $450,000 on your home. When I said that, it activated a part of you that you weren’t utilizing. You’ve been analyzing this all with your head. But when I said that, it made your heart flutter. Your heart is where you measure risk. What you are leaving out of this transaction that we are discussing is risk.

You have a $500,000 home on the line for only $20,000. That’s kind of wild. If I were in your shoes, I’d pay this little loan off today. The very reason you don’t want to go further into debt is called risk. That is why you don’t want to do that. You are not using that word, but common sense rises up inside of you, and that very reason is the reason I’m paying off the $20,000.

I’m not going to have a half-million dollar asset pledged for a $20,000 loan. That could end up bad and I don’t want to have any kind of problem with that. I think you are brilliant mathematically and that is probably getting in your way of using common sense a little bit. Your grandmother would have paid this off.

Here is what will happen that you don’t see coming. You are wired like I am, and I’m a math person too. When I started doing this 20 years ago, I didn’t understand parts of it. It’s not like you’ve been staying up nights worrying about this dinky loan, but when you pay this off, you are going to have a weird little experience. This wave of peace is going to go over you, and you’ll say wow.

That’s why your dad and grandfather would have paid this off. You are not at risk, and the way you’re doing this now isn’t making or costing you much money. It’s not really a big deal in your life. But if I were in your shoes, I would clean it up and be done with it. I would pay it off today.