A home equity loan is a loan that is secured using the equity in the home. This can be used for just about anything, such as for repairs or to pay off debt. You can also use it to pay off the remaining balance of your mortgage. This is usually done when there is more equity in the home and a smaller amount of the mortgage left and can create more flexible payments to pay off the debt compared to other types of loans. However, before opting for this, it’s a good idea to investigate it carefully.
Pros For Using a Home Equity Loan
There are several pros for using a home equity loan to pay off the mortgage. These include the following.
- Interest Rates are Lower – Interest rates are usually lower than other types of products, like credit cards, because there is security. The home itself is used to secure the loan, so lenders can offer a much lower interest rate.
- No Restrictions for Use of Funds – A home equity loan does not have restrictions on how the money can be used. This means the funds can be used to pay off part or all the mortgage, to pay off other types of debt, to improve the home, and more.
Cons for Using a Home Equity Loan
Like any financial product, there are some cons to using a home equity loan to pay off the mortgage. These should be considered carefully and include the following.
- Limited Amount of Loan – It is possible to borrow against the equity in the home, but the total amount is limited to 85%. If there isn’t enough equity in the home yet, the home equity loan isn’t going to provide the funds needed to pay off anything significant.
- Home is Used as Security – The loan is secured using the home as collateral. While this does help create lower interest rates, it does mean that missed payments could mean the home is foreclosed on to cover the funds that need to be paid to pay off the home equity loan.
- Closing Costs Can be Costly – know how much the closing costs for the home equity loan will be, as they can be costly. It is possible to roll them into the loan in some cases, but this adds to the amount of money borrowed that will need to be repaid.
How to Tell if a Home Equity Loan is a Good Idea
A home equity loan can be a good idea to pay off other debt in some situations, but there is some information that is needed to determine this. Potential borrowers will want to look at their current mortgage and credit profile carefully before making any decisions.
Sufficient equity is needed to make a home equity loan worthwhile. If there is not enough equity, the home equity loan isn’t going to be worth the time, effort and cost. Check how much is still owed on the home and compare this to the amount of money that can be borrowed with a home equity loan by calling or texting 1-800-804-SAVE (7283).
Check the interest rates carefully. Depending on when the mortgage was originally obtained and the current interest rates for a home equity loan, the new interest rate could be higher or lower. If the interest would increase compared to the interest that remains to be paid on the mortgage, it could mean paying more over the length of the loan compared to keeping the mortgage how it is. If this is the case, a home equity loan may not be a good idea.
Consider Other Refinancing Options
If there is still too much owed on the mortgage or the interest rates for the home equity loan are higher than the ones for the current mortgage, it may make sense to consider other more traditional refinancing options. Always look at all options carefully to determine if they’re worth the effort, affordable, and going to help pay off the mortgage faster.
If you’d like to pay off your mortgage and are thinking about using a home equity loan, take some time to look at your specific situation. This may not work out for you, or it could be a fantastic idea and help you pay off the mortgage faster. Be aware of risks to minimize them and you’ll be able to make the right decision for your finances. Speak to our professionals here at Fellowship Home Loans. We will help guide you through your options so you have the information you need.