04 Jan Should I pay down debt or save this money?

Q. I currently owe about $24,000 on a home equity line of credit (HELOC) and the current interest rate is 4.75 percent. I have a high-yield savings account paying 2 percent. This month I must take my Required Minimum Distribution from my IRA in the amount of $4000. Should I pay it towards my HELOC or deposit it in my savings account?
— Homeowner

A. Without knowing the whole of your financial situation, we’re going to tell you why we favor paying off the debt first.

Simply, your debt will grow at a higher interest rate than what you would be earning in your savings account, said Paul Criscione, a certified financial planner with Freedom Capital Management in Colts Neck.

“This is especially true since the new tax law suspends the deduction for home equity interest from 2018 to 2025, unless that loan was used to `buy, build or substantially improve’ the home that secures the loan,” Criscione said.

Examples of this may be an addition, a new roof or a kitchen renovation.

If you used the home equity money to pay off credit card debt, student loans or to take a vacation, the interest is no longer deductible, Criscione said.

“Unless you foresee an urgent expense taking place in the next six months that you might need funds for right away, it’s best to cycle down your credit line,” he said. “Cycling down your credit lines every year should also improve your credit standing with your bank.”

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