I have been in and out of debt several times in my life. At the moment, I have the most amount of debt EVER. If you’ve read my introduction, you’ll know that I briefly touched on why I am okay with the debt, but that doesn’t mean I don’t want it gone. Here is a breakdown of my debt sources.
- My mortgage. I bought my house in 2017 for $121,000. I secured a first-time homebuyer’s loan and put very little money down. My starting mortgage balance was $119,200. My current balance, five years later, is $99,417.01. I have moments where I want to get rid of the loan entirely, and I’ll pay a random amount of money toward it from my savings. I then have moments where I think about my great 4% interest rate and I pay only the minimum every month. I know this is something I need to be more consistent and conscientious about. For the moment, I am paying just an extra $50 every month as I focus on debt paydown and my business. Whether or not to pay off the mortgage faster will depend on the future of the property itself and that is a decision I have not made yet.
- HELOC. I took out a $44,000 Home Equity Line of Credit on my house. A home equity line of credit is a loan that is leveraged against my house and works similarly to a credit card. HELOCs all work a bit differently depending on your lender. In my scenario, I have a 30-year HELOC. For the next ten years, my loan is a line of credit. I can withdraw up to the $44,000 (which I did initially), and I am charged on the interest only for the next ten years. I have a starter rate of 1.99%. Once the introductory period is over, I will switch to a variable rate. As I pay the loan down, I can continue to take the money out up to the $44,000 limit. (e.g., I pay the loan down to $30,000. I can take out $14,000 if I desire or $100, whatever I want as long as the total amount is not more than $44,000). After the ten years, the line of credit is over and I enter repayment for the next 20 years. Whatever amount I took out, be it $44,000 or $4,000, the line of credit becomes a loan, and I am issued a monthly payment to be paid off over the course of 20 years unless I decide to pay it sooner. The HELOC is an interesting loan for me. While I am working avidly to pay the loan off, there is a good chance I may withdraw from it again if the right business opportunity presents itself. There is a good chance it will be a while before this loan is paid back in full.
- 401k loan. I took out $20,500 from my 401k, my retirement savings for my part-time job to help with the costs of starting my real estate business. I have an 8.5% interest rate, but the great thing is, the interest I pay goes into my retirement account. I essentially borrowed from myself. Every 401k is different depending on the company that holds the program and your employer. In my situation, the only amount I paid out was a $50 fee to take the loan. The repayment and the interest all goes back into my account. While I am missing out on current investment growth of the amount I took out, I am hoping with my continued contributions, my repayment, and the interest payment back into the account I won’t be hit too hard. I am also hoping that the future returns I make on my real estate business will make taking out the loan worth it. At the moment, I mostly plan to make the minimum payback amount on this loan.
For the time being, I will focus on paying back the HELOC, while putting just a little extra each month off the 401k loan. As my priorities shift and decisions are made, I may shift extra repayments to one of the other two loans. Whether or not I decide to rent my house in the future or sell it will greatly impact the first two loans. Deciding when to quit my part-time gig will greatly impact my third loan, as the loan would have to be paid off prior to quitting or it will be called due. I’m not sure what the future will hold for these loans, but for now, I’m going to keep chipping away and watching the balances go down.
