When Dire Straits sang about "Money for Nothing" in the "80s, the British rock band couldn't have known it was almost a prediction. Today's rock-bottom interest rates may be tempting you to borrow more against your HELOC, but think twice -- and maybe three or four times -- before doing it. Even in this low-interest rate environment, there are good reasons to pay off your HELOC balance once and for all.

More financial stability

Debt reduction always leaves you financially stronger and more nimble. If, for example, you were to lose your job tomorrow, you'd have more leeway to accept a new position at a lower rate of pay if you have a lower debt balance. It also gives you more flexibility to make major life changes, such as moving, transitioning from a two-income family to a one-income family, or changing careers.

Feels like a pay increase

Even if your interest-only payment is low, you're still paying cash each month. Eliminating one monthly payment feels similar to getting a raise - you're left with more money after paying your bills, and you didn't have to work more hours to get it.

Lower your interest costs

If you owe $50,000 on a prime rate HELOC, your monthly interest cost is $135. Annually, you're paying about $1,620. There must be something more exciting to do with that money.

Eliminate the refinancing challenge

A standard HELOC is not set up for you to make the final payment at the expiration date. Generally, your payments cover the interest and, maybe, a small bit of principal. This means you'll probably have a balance when your HELOC expires, and you'll need to refinance that debt. If you're still in good standing, your existing lender could offer an extension or another solution.

A typical remedy is a fixed-payment home equity loan, with closing costs and higher monthly payments. That's the best-case scenario. Worst case, you run into financial troubles and your lender refuses to work with you. At that point, you may have to sell the house to fend off foreclosure.

Free up credit for an emergency

Financial advisors recommend that you maintain an emergency fund to cover three to six months of expenses. If you don't have that kind of cash sitting around, an unfunded HELOC can be a second option. The operative word here is unfunded. A maxed-out HELOC won't work.

More savings

Everyone has at least one good reason to save money. You might be building your retirement reserves, stashing cash for your daughter's wedding, or tucking away funds for your child's education. Whatever your objective, you'll get there faster with less debt. Once the HELOC is paid off, you can redirect the payment into a designated savings account.

Avoiding surprises

Money for nothing (or close to it) is tempting to keep around. But interest rates change over time. The very best reason for paying off your HELOC is to avoid getting caught with a rising payment when interest rates begin to skyrocket, so you don't find yourself in dire straits.

Published on October 20, 2010