love/Getty Images
The recent surge in housing prices has left the average American homeowner worth about $300,000. home equity. And this amount increased by an average of $24,000 in 2023, $14,300 in 2022, $64,000 in 2021 and $26,300 in 2020.
While increasing your home equity means bigger gains when you sell your home, it also gives you access to higher borrowing limits for home equity loans And home equity lines of credit (HELOC).
And, in some cases, you may have enough home equity to pay off your mortgage with a home equity loan or HELOC. But should you use the equity in your new home to pay off your mortgage? Here’s what the experts think.
Compare today’s best home equity loan options.
Use your home equity to pay off your mortgage? Here’s what the experts think
If you use a home equity loan To pay off your mortgage, you essentially refinance your mortgage balance. To know if it’s a good decision or not, you’ll have to do the math.
The first step is to review your current mortgage and take note of the following:
- Remaining principal balance
- Interest rate
- Time remaining on your term
- Monthly payment amount
- Remaining overall cost
- Early repayment penalties
Next, collect quotes from a handful of home equity lenders and compare them to your current mortgage. When doing so, be sure to take into account any applicable fees.
“Closing costs may be involved that increase the total cost of the loan, especially if they are rolled into the principal borrowed,” said Leslie H. Tayne, Esq., founder and managing director of Tayne Law Group and author of Life . and debt.
In addition to comparing second mortgages to your current loan, you may want to consider mortgage refinancing Also. All things being equal, home equity loans generally have lower interest rates than second mortgages because they require a first lien position. That said, they may have higher fees.
Either way, it’s a good idea to collect a few mortgage refinancing quotes and see how they compare.
Find out what home equity loan rates you could qualify for today.
When Paying Off Your Mortgage With a Home Equity Loan Can Make Sense
If a second mortgage ends up beating a mortgage refinance and your current loan, it could be worth it.
“Ultimately, using your home equity to pay off your mortgage can be a good idea if your finances are stable and you can get a lower rate than you are currently paying on your existing mortgage,” said Tayne said.
Michael Hills, Certified Fund Specialist, Certified Income Specialist and Financial Advisor at Apex Wealth, offered similar advice.
“If the mortgage rate is significantly higher than current market rates and refinancing is not a viable option, tapping into home equity to pay off the mortgage might make sense,” said Hills.
However, it may be more than the interest rate it seduces you. For example, if you are going through a period of low income but expect a big increase within five years, the structure of a HELOC can allow you to make much smaller payments during the 10-year draw period. Additionally, a no-fee second mortgage might be more attractive than a traditional mortgage refinance if you don’t currently want to cover the upfront costs.
The essential
Although home equity loans are generally not the ideal way to refinance a mortgage, they can be beneficial in certain situations. “It’s important to do the math and make sure you’re going to come out ahead in the long run,” Tayne said.
That said, refinancing a mortgage is a high-stakes decision. If you have any doubts or concerns, consider speaking with a financial professional. “It is strongly advised that you consult a financial advisor to discuss these factors in the context of your personal financial goals and circumstances,” Hill said.
Grub5
