Pay off Your Mortgage with Home Equity Loan

Sunday, Jun 11, 2006

Home equity loans are sometimes ideal for those who have small balances remaining on their mortgages and want to avoid the cost associated with refinancing. If you only owe a few thousand dollars and can pay that all off at a lower rate without high fees, it can be a clever financial tactic.

Better than a mortgage refinance

Consider this scenario: A homeowner has property worth $300,000, and a 30-year, 8.5 percent conventional mortgage with an outstanding balance of only $30,000. If the homeowner decides to refinance in order to drop to a lower 6 or 7 percent rate, the mortgage refinance fees alone might cost five to 10 percent of the amount of the remaining balance. This would make a mortgage refinancing an unwise choice.

One smart solution to this problem would be to use a Home equity loan and borrow the 30 grand. The mortgage can be entirely paid off without incurring steep refinance fees, and the process for securing the funds is relatively simple and fast when compared to ordinary refinancing.

Home equity loans are available from most lenders, and they can be paid off gradually, over a period of decades. For those who owe a relatively small amount on a high interest rate mortgage, converting to a home equity loan to pay off the balance may be a great way to save substantially over time, while also reducing the life of the loan. If you plan to retire in 15 years, for example, you can schedule the payoff of your home equity loan to coincide with retirement, in order to retire with extra savings and no house payment.

The versatile HELOC

Another alternative is to use a home equity line of credit, or HELOC. The big advantage with a HELOC is that, generally speaking, only payments of interest, not principal, are required during the first few years of the loan. That can significantly reduce monthly payments, in a similar way to the popular "interest only" mortgages. A HELOC will carry an adjustable rate, however. For those who expect rates to continue to rise and want to pay over a long period of time, a home equity loan with a fixed rate is a more predictable and worry-free option.

Paying off your mortgage with a home equity loan may seem strange. But in some circumstances, it may pay not to be a stranger to good financial sense.

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