credible Operations, Inc. NMLS # 1681276, is referred to here as “ credible. ” As a homeowner, you ’ ve built equity over the years by paying down your mortgage and watching your home value increase. In some cases, it could make common sense to tap that fairness 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 .
Here’s how to know if using a home equity loan or HELOC to pay off your mortgage is a viable option for you:
How home equity loans work
When you take out a home equity loan, a lender gives you a collocate sum of money that you ’ ll retort in pay back installments over time, normally five to 30 years. The total you can borrow depends on the come of home equity you ’ ve built .
concern rates on home fairness loans are normally lower than rates you ’ five hundred find on an unguaranteed personal loan or credit calling card because your home serves as collateral. But if you can ’ thymine pay rear the loan, your lender has the right to foreclose on your place .
Pros of a home equity loan
- Fixed repayment terms: Home equity loans usually come with a fixed rate and fixed payments. That means you’ll 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 you’d 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.
Cons of a home equity loan
- Home serves as collateral: Home equity loans and home equity lines of credit (HELOCs) are both secured by your property. If you default on these second mortgages, you could lose your home.
- Closing may be expensive: Home equity loans may come with closing costs, though some lenders waive the fees or roll them into the loan. If you have to pay these fees, they’ll add to your borrowing costs.
- Loan amounts are limited: You can typically borrow up to 85% of the equity in your home. So if you have $300,000 in equity, for example, the maximum you could borrow is $255,000. If you haven’t built enough home equity to zero out your mortgage, think about holding off until your home equity increases.
How to use a home equity loan to pay off your mortgage
It ’ s possible to use a home fairness loanword to pay off your mortgage, but you ’ ll want to make sure it ’ s the right field move for you .
After comparing your home equity loanword options, make sure that :
- You can borrow enough to pay off your first mortgage
- The home equity loan interest rate is lower than the rate on your first mortgage
- You won’t end up paying more in interest than if you were to ride out your mortgage
Take a look at one example to see how this strategy might work in your favor:
Let ’ s say your home is worth $ 400,000. Your mortgage balance is $ 82,000 with an interest rate of 4 % and a monthly mortgage requital of $ 1,527. You alone have five years left on the home loan. If you were to finish out the remaining five years, you ’ five hundred pay $ 8,796 in interest .
But say you qualify for an $ 82,000 home equity loanword with no closure costs, an interest pace of 3.25 %, and a lend term of five years. The monthly home equity lend payment is about $ 1,483, and you would pay about $ 6,954 in pastime over the loanword term .
In this example, the dwelling equity lend helps you save $ 44 on your monthly payment and $ 1,842 in overall interest. To find a great rate on a home refinance, consumption credible. We let you see personalized prequalified refinance rates from all of our partner lenders. It entirely takes a few minutes. Best of all, it ’ mho free and we won ’ deoxythymidine monophosphate sell your data or spam you with telephone calls .
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How HELOCs work
Home equity lines of recognition, normally referred to as HELOCs, are different from home fairness loans because you get access to a argumentation of credit — alike to a credit card — rather of a collocate summarize of money .
HELOCs besides come with varying interest rates. During the tie period, you can draw from the citation lineage adenine much as you need, up to a preset utmost sum. Once the hook period ends, normally after 10 years, you ’ ll insert a repayment time period and pay off your balance.
Homeowners can normally borrow up to 75 % to 85 % of a home ’ second appraised value, minus any outstanding home lend balance .
Pros of a HELOC
- Low interest rates: Interest rates on HELOCs are generally lower than what you’d find on a credit card or personal loan because the line of credit is secured. In some cases, HELOC rates even beat home equity loan rates.
- No restrictions on how you can use the money: A HELOC allows you to borrow as much money as you need (up to your credit limit) and you can use the funds for any expenses you have, such as paying off your mortgage or making home renovations.
- Flexible repayment terms: Some lenders only require you to make interest payments during the draw period. And there are even fixed-rate HELOC options too, which allow you to lock in a rate on the sum you borrow.
Cons of a HELOC
- Interest rates may increase: Home equity lines of credit come with variable rates, which means your rate can go up or down over time. That makes your monthly mortgage payments unpredictable, and you might end up paying more interest on the HELOC than you would on your first mortgage.
- Home serves as collateral: Like a home equity loan, a home equity line of credit is secured by your house. If you can’t pay back the money, your lender has the right to start foreclosure proceedings, and you could lose your home.
- Overspending: The easy access to cash might be convenient for home upgrades and emergency payments, but if you’re not disciplined, you could be susceptible to spending beyond your means. Make sure you only borrow what you need and can afford to pay back.
Check Out: Here’s What You Need to Get a Home Equity Loan or HELOC
How to use a HELOC to pay off your mortgage
If you want to pay off your first mortgage using a HELOC, it ’ mho important to consider how much you can borrow, whether you ’ ll save money, and why you ’ re taking out the trace of credit .
Tip: Consider looking into a fixed-rate choice so that you won ’ thyroxine have to worry about your interest rate rising during the repayment period. Let ’ s use the home loanword exemplar from the previous incision : You have a home worth $ 400,000, and your mortgage balance is $ 82,000 with an pastime rate of 4 %. You ’ rhenium making monthly payments of $ 1,527 and you have five years remaining on the loanword. By finishing out the loanword, you ’ five hundred pay $ 8,796 in interest .
now, say you qualify for an $ 82,000 HELOC with no conclusion costs and an initial matter to rate of 1.99 %. Your draw period is five years, and you have a refund term of 15 years .
here are the two options you ’ ll want to compare if you ’ re looking to use the HELOC to pay off your mortgage :
Repay the HELOC within the draw period
This could be a good option if you want to pay down your debt cursorily and save on pastime. Your monthly requital would equal about $ 1,437, and you end up paying just $ 4,215 in matter to over five years .
Compared to your first base mortgage, the HELOC saves you $ 90 on your monthly payment and $ 4,581 in entire interest. Of course, any rate increases will drive up your matter to costs — this is why opting for a fixed-rate HELOC is typically a better option .
Pay the minimum during the draw period
If your monthly income recently dropped, you might choose to just make the minimum payment during the drawing card period .
In the aforesaid example, the minimum interest-only payment is about $ 136. once the refund condition starts, the monthly payment rises to $ 527. Over the entire 20-year HELOC term, you ’ five hundred pay $ 21,073 in matter to — and that ’ s without any rate increases .
This option won ’ thymine save you money on sake compared to the inaugural mortgage, but it can put breathing room in your budget.
Which option is right for you?
Taking out a home equity lend or HELOC may save you money on matter to compared to paying down your first mortgage on schedule. Or, if your budget is tight, replacing your mortgage with a HELOC could help you better afford your dwelling .
But you ’ ll want to compare the first mortgage against the lend terms you qualify for, including :
- How much you can borrow
- The interest rate
- Closing costs and annual fees
- Whether the rate can increase over time
- How much you’ll pay in interest
If you ’ ve determined a home equity loanword or HELOC won ’ t employment for your situation, you might consider a rate-and-term refinance or a cash-out refinance .
A traditional refinance may help you lower your matter to rate and monthly payment, while a cash-out refi allows you to refinance your home and tap your equity for a lump union of money.
|Home equity loan||Home equity line of credit (HELOC)|
|Disbursement||Cash up front in one lump sum||Draw cash as needed, up to limit|
|Repayment||Fixed monthly payments||Open-ended. Interest-only payments often allowed during draw period|
|Interest rate||Typically fixed||Usually variable|
|Interest charges||Interest charges apply to entire loan balance||Only pay interest on amount you draw|
|Points, closing costs, and fees||Lender may charge points, closing costs and fees||No points, closing costs may be lower|
About the generator
Kim Porter is an adept in credit, mortgages, student loans, and debt management. She has been featured in U.S. News & World Report, Reviewed.com, Bankrate, Credit Karma, and more .