I'm in my 60s with $85,000 in credit-card debt. Should I use the equity in my home or my investments to pay it off?

By Aarthi Swaminathan

'Currently, the debt gets rolled over to another 0% interest card right before the regular interest rate is about to kick in'

Dear Big Move,

I am in my 60s and considering getting a home-equity line of credit or a home-equity loan to pay off $85,000 of debt.

Currently, the debt gets rolled over to another 0% interest card right before the regular interest rate is about to kick in.

But I pay a 5% fee each time I do this, and usually the term is for around nine months. I figure annually I'm actually paying about 7% for the $85,000 debt annualized. It's unsecured debt, so it's not tied to my house.

My options are to do a HELOC at 8.5%, or a home equity loan at 6.375%, or to pay the debt off entirely by selling investments.

'My options are to do a HELOC at 8.5%, or a home equity loan at 6.375%, or to pay the debt off entirely by selling investments.'

My investments are currently making way more than any of those rates though so I am loath to sell anything right now.

Or the fourth option is to keep doing the credit-card rollover dance until I can pay them off fully.

My house is worth over $1.2 million, and I owe $513,000. My industry has been very erratic over the last two years, which is how I accrued the debt.

My work has slowed down a lot. I've also had to take time off for a couple of surgeries. As a freelancer I don't make income when that happens. I am also single.

So while I am making progress on paying down the debt, it's slow going. The ultimate plan is to sell this place when I retire and buy outright in a much cheaper area with the proceeds.

By changing to a HELOC or home-equity loan (HEL), I will greatly reduce my monthly minimum payments.

But obviously it would then be secured debt, versus unsecured, which gives me pause, since my house is on the line.

Doing the Debt Dance

'The Big Move' is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage. Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.

Dear Dance,

I'm not sure if the credit-rollover dance is something you can or should do long-term without feeling mentally and financially exhausted. You need to plug the holes in your boat before you end up sinking it.

That $85,000 in outstanding debt that needs to be paid soon, as it is not debt that is going towards something meaningful and could lead to profits, like building a business, or an investment property.

Since you're able to consistently find another 0% interest card to roll it over to, you have a little time to think about this next move. But you need to avoid paying this 5% rollover fee again.

The good news is you have two big assets - your investment portfolio and your $1.2 million home. You just need to figure out what will be the best way to do this without incurring a big tax bill.

HELOC vs. HEL

At first, the home equity route seems like the smartest way. A HELOC functions like a credit card, giving you a revolving line of credit and has a variable rate. As such, it's typically used for more uncertain expenses: a house renovation or college fees that could vary over time.

A HEL, on the other hand, simply gives you a one-time lump sum with a fixed interest rate, and provides certainty for a fixed expense - like a $85,000 debt.

A HELOC would provide you an option for interest-only payments, but with an interest rate of over 8%, the potential spread of gain in investments isn't very favorable, said Autumn Knuston, a Tulsa, Okla.-based certified financial planner and a board ambassador for the CFP.

The spread refers to what you can expect as the return on your investment versus the interest rate you pay on your debt.

A HELOC functions like a credit card with a revolving line of credit and a variable rate. A HEL gives you a one-time lump sum with a fixed interest rate.

The average home-equity loan interest rate is 8.39%, and the HELOC rate is 8.94%, as of Sept. 25, according to Bankrate. Bear in mind that HELOC and other home-equity rates could fall over the coming weeks and months due to the Federal Reserve cutting its benchmark rate.

A home-equity loan at a lower rate would "at least allow you some potential for investment return spread if you have a diversified portfolio at moderate risk over time," she added.

But the time frame you're working with might not make it worthwhile to undertake a HELOC or a home-equity loan.

What does that mean? Well, if you have 20 years to spare, there is a higher likelihood of you getting a higher expected return, than over five years, since you're close to retirement.

"With a 5-year time horizon your spread is less likely to be the average return expected, and therefore you could have a higher or a lower return," Knuston explained. So "the risk of lower return is not worth the potential of the higher return."

Selling investments to pay your debt

The best option is, in fact, for you to bite the bullet and pay the debt off with your investments. This is assuming that they are in a taxable brokerage that wouldn't incur penalties, Knuston added, and also factor in any capital gains you might face down the line.

Your plan to move once you retire in a few years is a solid one. You're cutting your housing and living costs considerably with such a move, and you're gonna end up with a house free and clear, no mortgage, no debt.

But for now, you need to lower your debt burden, given your instability with your job.

So much of America is one paycheck away from not being able to pay for basic necessities like groceries or rent.

Unlike millions of people less fortunate than you, you have the ability to extinguish your debt and live without it hanging over your head.

Fix the problem now while you can - before you run out of options.

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-Aarthi Swaminathan

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09-30-24 0738ET

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