How To Pay Off Mortgage With Home Equity Loan

Pros Of A Home Equity Loan

• Fixed repayment terms: Home equity loans usually come with a fixed rate and fixed payments. That means youll know exactly how much you owe each month and when the loan will be paid off.
• Low interest rates: Because your home serves as collateral, home equity loans usually have lower interest rates than youd get with other products, such as credit cards and personal loans.
• No restrictions on how to use the money: Some financial products restrict how you can use your borrowed money. But when you take out a home equity loan, you can use the funds for whatever you need including paying off your mortgage early.

Paying Off A Mortgage With A Home Equity Loan

You might be able to take out a home equity loan and access a lump sum to pay off some or all of your existing mortgage. If the interest rate is lower on the home equity loan than your mortgage, you could save on monthly repayments. These loans usually have a fixed interest rate so its not difficult to calculate against other fixed-rate mortgages. But you should take into account other fees, such as a home equity loan closing fee which can be around 2-5% of the total loan amount.

You may also want to consider using a HELOC to pay off your mortgage. A HELOC is also a loan based on your homes equity, but it is provided as revolving credit not dissimilar to the way you access credit from a credit card. The HELOC would be used to make frequent payments towards an ongoing mortgage. This is beneficial if the interest rate is lower than your current mortgage and any home equity loan products. However, it includes an element of risk because HELOCs typically have a variable interest rate that could increase.

How Do I Apply For A Home Equity Loan

Applying online is a great way to start the home equity loan journey. Apply for prequalification or chat with one of our Home Lending Advisors to see what works best for your situation.

Now that you know what a home equity loan can be used for, you may want to speak with a Home Lending Advisor to figure out which type of loan best fits your needs.

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Home Equity Loans: A Complete Guide

Home equity loans are a useful way to tap into the equity of your home to obtain funds when your assets are tied up in your property. Theyre generally offered at lower interest rates than other forms of consumer loans because they are secured by your home, just like your primary mortgage.

Read on to learn more about home equity loans and other ways to take advantage of your equity to decide if this loan option is right for you.

Assess Your 2023 Financial Strategies

The beginning of the new year is the perfect time to take a look at your budget and see what you can do to reduce your spending, re-evaluate and reduce ongoing monthly expenses, and make effective plans to tackle your debt.

Eliminating and reducing your expenses is an effective strategy to free up money to put toward your debt, especially if your debt is manageable. Our guide, The Best Budget for You, can help you create a spending plan that works for your financial picture, making sure there are enough funds to pay your bills and allowing you to allocate money for debt as well as savings.

As part of your financial strategy, youll also want to scrutinize your debt inventory to create a plan to pay down your debts. If your debts are smaller, focus on high-interest credit card accounts to eliminate these first. If your debts are significant, consider securing a loan to consolidate your debt and reduce your monthly bills or interest payments. If you take out a loan, however, be sure to incorporate these payments into your budget and make plans to reduce your spending so you dont accumulate even more debt in the coming year.

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Any Claim The Lender Has On Your Property Disappears Once The Debt Is Repaid

One of the scariest things about a home equity loan is that the lender has permission to sell your house if you fail to keep up with repayments. In exchange for loaning you a big lump sum of cash, the financial institution is granted a legal claim on your property and the right to take possession of your property to recoup what it is owed. In other words, once you sign on the dotted line, you are technically a slipup away from becoming homeless.

What Is A Home Equity Line Of Credit

A home equity line of credit, or HELOC, is a second mortgage that gives you access to cash based on the value of your home. You can draw from a home equity line of credit and repay all or some of it monthly, somewhat like a credit card.

With a HELOC, you borrow against your equity, which is the homes value minus the amount you owe on the primary mortgage. You can also get a HELOC if you own your home outright, in which case the HELOC is the primary mortgage rather than a second one. When youre shopping around for a loan, borrowing from the equity in your home will often get you the best rate.

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Reasons To Tap Equity On A Paid

Why would anyone pursue fresh financing after finally paying off a mortgage? There are many viable reasons, from funding a home improvement project or investing in a business to purchasing more property. Two good rules to follow: Use your equity for long-term projects that create more value than the cost of the loan, and dont take out more than you can afford to lose.

Many seek to pay for their childrens educational expenses, fund their retirement or pay for an unexpected medical emergency like cancer care for a loved one, says Kelly McCann, an attorney specializing in construction and real estate with Burnside Law Group in Portland, Oregon.

There are also not-so-good reasons to draw from your equity, such as buying a car , paying for a wedding or taking a vacation. Its important to get clear on your goals so youre making a sound financial decision.

Editorial Selection: Best Online Heloc

• Flexible terms, redraw up to 100%, borrow up to $400K
• Use to consolidate debt or finance your next project
• 100% digital app & online appraisal
• Check your rate without impacting your credit

Figure is a great option if youre looking for an online lender that can get you your funds quickly. You have no obligation to use your total line of credit, and the funds can be used however youd like. There are no closing costs or out-of-pocket costs.

If youre unsure if Figure is right for you, you can pre-qualifywith no risk to your credit scoreand get a free quote. This can help you evaluate whether the companys HELOC is the best fit.

Here are some important details about the product:

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Theres A Limit To How Much You Can Borrow

Theres also a limit to the amount you can borrow on a HELOC or home equity loan. To determine how much money youre eligible for, lenders will calculate your loan-to-value ratio, or LTV. Even if you have $300,000 in equity, the majority of lenders will not let you borrow that much money.

Lenders generally allow homeowners to borrow up to 80 percent to 85 percent of the value of their homes, minus existing mortgage balances. That number can be different from person to person, though, and depends heavily on your credit score, financial history and current income.

Should You Mortgage The House You Outright Own

Whether or not you should pull the trigger on a new cash-out mortgage , home equity loan, HELOC, reverse mortgage or shared equity investment depends on your circumstances, short- and long-term financial goals and ability to repay the debt. If you were to lose some retirement income, say, would you still be able to make the payments?

Homeowners should ask themselves: What is the purpose of the funds needed? They also need to assess their individual financial situations to ensure they have the cash flow to pay off the loan in the future, particularly as they approach retirement, says Gupta.

Practice due diligence when shopping for a mortgage, like any financial product, and make sure they shop around with several lenders to find the best option and determine their best course of action, says Hackett.

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Pros And Cons Of Using A Home Equity Loan To Pay Off Your Mortgage

Key Benefits:

• Its easier to budget for the monthly payment as it stays the same over the life of the loan.
• The interest rates are more competitive than what youll find with many other loan products.
• There are no restrictions on how you can use the funds.

Key Drawbacks:

• Your home is at risk for foreclosure if you default on the payments.
• Youll pay interest on all the loan proceeds, even if you dont use the entire amount.
• Most lenders assess points and fees in addition to closing costs.

What Is Home Equity

Home equity is the difference between the value of your home and how much you owe on your mortgage.

For example, if your home is worth $250,000 and you owe $150,000 on your mortgage, you have $100,000 in home equity.

Your home equity goes up in two ways:

• as you pay down your mortgage
• if the value of your home increases

Be aware that you could lose your home if youre unable to repay a home equity loan.

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What Is A Home Equity Agreement

A home equity agreement is a debt-free option you can use to convert your homes equity into cash. Its an arrangement between a homeowner and investor that gets you money today in exchange for a share of the future profits in your home.

You wont have to refinance your home. Even better, youll have 10 years to decide if you want to sell your home or buy out the agreement.

How Home Equity Loans Work: Rates Terms And Repayment

Traditional Home Equity Loan: This type of loan allows you to borrow a fixed amount of money in one lump sum usually as a second mortgage on your home in

Looking to payoff your home equity loan or HELOC? Use our free payoff calculator to see how fast your can do it.

Use this calculator to see how long it will take to pay off a home equity loan or line of credit. Increase your payment for a faster payoff.

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Is It A Good Idea To Take Equity Out Of Your House

Under the right circumstances, using home equity to pay off debt really can help you get out of debt faster and save money. The only way to know for sure is to run the numbers and see how much each option may cost you.

Heres an example of how to do this if youre working to pay off $20,000 worth of credit card debt.

Run your numbers with Credit Karmas debt repayment calculator.

One important consideration is how secure you are in making these new payments. If you think theres any chance you could default or you dont feel comfortable taking that risk, using home equity to pay off debt may not be a good choice for you.

Thoughts On Using A Home Equity Loan To Pay Off Your First Mortgage

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Can I Pay Off A Home Equity Loan Early

Yes, you generally are able to pay off a home equity loan early, although this can vary depending on the terms of the specific loan. HELOCs in particular are designed to offer maximum flexibility, particularly during their initial draw period. Mortgages and second mortgages can typically also be repaid early, although they may be subject to prepayment rules and penalties.

Using A Home Equity Loan Or Heloc To Pay Off Your Mortgage

Using equity to pay off your mortgage may help you save money on interest or complete your mortgage payments ahead of schedule.

Edited byChris JenningsUpdated July 1, 2022

Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

As a homeowner, youve built equity over the years by paying down your mortgage and watching your home value increase. In some cases, it could make sense to tap that equity to zero out what you owe on the first mortgage.

You might be able to reduce your monthly mortgage payments, save on interest, and pay off your home ahead of schedule.

Heres how to know if using a home equity loan or HELOC to pay off your mortgage is a viable option for you:

• Which option is right for you?

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Why Use Our Home Equity Loan Payoff Calculator

Before you take on a new loan, it is always a good idea to see if the monthly payment will fit in your budget and safeguard against negative impacts on future plans. Using this calculator will help you see how long it will take to pay off a desired loan amount with your preferred monthly payment.

Please keep in mind that home equity loans and lines of credit generally have a 10-year maximum repayment period, although that can vary by financial institution and your financial condition.

Is Getting A Heloc A Good Idea

Whether a home equity line of credit is a good idea really comes down to your goals and financial situation. A HELOC is often used for home repairs and renovations, which can increase your home’s value. Another bonus: The interest on your HELOC may be tax-deductible if you use the money to buy, build or substantially improve your home, according to the IRS.

Some use home equity lines of credit to pay for education, but you may get better rates using federal student loans. Financial advisors generally dont recommend using a HELOC to pay for vacations and cars because those expenditures dont build wealth, and may put you at risk of losing the home if you default on the loan.

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Refinance With Line Of Credit

Depending on the value of the home and the balance of the mortgage, you can refinance your home into a home equity line of credit. This essentially puts the entire loan balance into a simple interest situation and gives you the flexibility of making an interest-only payment should you have a financial hardship at some time during the loan.

Warning

Never take on more debt for your home unless you have the resources and discipline to pay it. It can sound great to make a $25,000 principal reduction payment but you are still responsible for your mortgage payment.

References

How A Home Equity Loan Works

A home equity loan is the second mortgage where your house serves as collateral. It works on a simple principle:

• You go to a lender and choose the type of loan: fixed-rate or revolving line of credit.
• Then you go through a credit check. You also provide documentation and an estimate of the value of your home.
• The lender offers you possible loan terms. Usually, the loan amount is determined by the following formula: * 85%.
• If you choose a traditional mortgage with a specific payment plan, you get the amount deposited into your account and pay it back in small monthly installments.

It is important to remember that in this situation, you are getting a loan secured against your home, and you could lose it if you do not pay it back on time. Also, the value of your property in the market is unstable, so if you want to sell it at some point, you might lose some money.

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