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How to use a HELOC to pay off your mortgage

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A Home Equity Loan or HELOC can be an option to pay off the mortgage or to zero the mortgage outright. Here’s how the strategy works: (shutter stock)

Home equity loans and home equity lines of credit (HELOCs) are valuable tools that help you cash in your home equity. A home equity loan or his HELOC can be used to pay for large expenses such as home improvement projects.

In some circumstances, these home equity financing options may reduce your monthly mortgage payments, pay off a mortgage Move forward. Before you start the process, find out how home equity loans and HELOCs can help you pay off your mortgage and whether it can save you money in the long run.

With Credible, Get a HELOC Through Lender Partners.

How HELOC works

Unlike home equity loans, which offer a lump sum, HELOCs offer access to lines of credit. In this way, HELOC works like a credit card and you can withdraw money up to your limit if you want.

In general, borrowings should not exceed 85% of the total loan value (CLTV) ratio. CLTV measures your current mortgage balance plus the amount you want to borrow versus the value of your property.

HELOCs typically have a floating rate and two terms.

  • Draw Period — During this period, which usually lasts 10 years, you can access a line of credit up to your limit as needed and make interest-only payments on the amount borrowed.
  • repayment period — This period lasts 10 to 20 years and begins when the lottery period ends. During this period, you will not be able to access your funds and will be required to make monthly installments including principal and interest.

How to pay off your mortgage with HELOC

Paying off or canceling your original mortgage with a HELOC is an option, but not everyone should consider it. If you have enough capital and can get a lower interest rate, you may be able to save money, but often the devil is in the details.

Let’s say your house is worth $500,000 and you have a remaining mortgage balance of $100,000. Twenty-five years ago you took out a mortgage with an interest rate of 6% and monthly payments of $2,398.20.if you continue pay off the house Over the next five years, you will pay $19,843 in total interest for that period.

But what if you could get a $100,000 HELOC with no closing costs, a floating rate of 3.99%, a 5-year withdrawal term, and a 15-year repayment term? There are two options for

Pay back your HELOC within the lottery period

With this option, you can pay off your home after 5 years, reduce your monthly payments, and save on interest. Your monthly principal and interest payments will be $1,841.20, about $557 less than your original mortgage. In addition, you will pay $10,427 in interest on your HELOC, which is $9,416 less than you would have paid on your original mortgage.

However, keep in mind that HELOCs are floating rate products, so your APR and monthly payments may increase as interest rates rise.Some lenders now offer Fixed rate HELOCwhich may be a better option.

Also, be aware that some lenders impose early prepayment penalties. So, before implementing this strategy, you should understand the terms of his HELOC you are considering.

Pay the minimum amount during the drawing period

If your income is less than before, you may choose to minimize your interest-only payments during the drawing period. Using the example above, the minimum payment would be $332, rising to $739 over the 15-year repayment period.

In this case, you’ll have a lot more room in your budget, and your monthly payments will be reduced by about $2,066 during the withdrawal period and by about $1,659 during the repayment period. The problem, of course, is that you’re paying interest over a much longer period (more than 15 years, to be exact), totaling over $53,000 in interest.

Again, these numbers do not take into account the possible interest rate increases associated with floating rate HELOCs. With this option, you’ll be paying more interest than your original mortgage, but it might give you more room in your budget.

Should I use HELOC to pay off my mortgage?

Choosing to use HELOC to pay off your mortgage depends on your unique financial situation. If your mortgage balance is low and you can secure a lower interest rate, this option may make economic sense.

On the other hand, if you don’t have enough assets and interest rates are already low, you may not be able to get a HELOC with a low enough APR to make it worthwhile.

Also, a floating rate HELOC is usually not a good option if your income is spotty or irregular. As interest rates rise and your income declines, it can become difficult to budget your monthly payments. If he can’t pay, he risks losing his home as it protects his HELOC.

Another thing to consider is the initial and annual fees associated with HELOC.

  • appraisal fee
  • Application fee
  • closing cost
  • Annual fee
  • Inactivity fee
  • Early advance payment fee

how to get a home equity loan

If you don’t need access to money for an extended period of time, a home equity loan may be a better option. A home equity loan offers a one-time lump sum payment. This may be all you need to pay for a new roof, install a pool, or finance other major home renovations. Follow these steps to find a home equity loan that fits your needs.

  1. Decide how much you want to borrow. Understanding how much money you need to reach your goals is helpful when buying and comparing loan offers.
  2. Calculate your home equity. To qualify for a home equity loan, you need at least 15% to 20% equity. To determine the amount of equity you own, subtract your current mortgage balance from the market value of your home.
  3. Shop from multiple lenders and compare rates. Interest rates and repayment terms vary by financial institution, so we recommend comparing multiple loans. best rate and terms for you.
  4. Submit your application. Once you’ve chosen a lender, fill out an application and submit the required documents such as recent payslips, bank statements, and proof of employment.
  5. Please sign the loan. Once the loan has been processed, you can pay the termination fee and open a new loan account.

How to get HELOCs

If you have at least 15% equity in your home, you may qualify for HELOC, and lenders will consider your credit, debt-to-income ratio, and other factors. The process of getting a home loan is as follows.

  1. Buy and compare lenders. To ensure you get the best deal, it’s wise to shop with multiple lenders. Compare loans, rates and terms to find the best HELOC for your needs.
  2. Gather supporting documents. Before you apply, collect your government-issued identification, bank and investment account statements, pay slips, W-2s, and other documents that verify your citizenship, income, and employment.
  3. Complete the application. Fortunately, filling out a home equity loan application online is usually quick and easy. After submitting your application, the loan agent may ask you to send additional documents or schedule a property appraisal.
  4. Close the loan. On the closing date, sign the paperwork, pay the closing fee, and activate the HELOC. Loan processing and closing can take 2-6 weeks.

Home equity loan or HELOC, which is better?

decision between Home Equity Loan and HELOC You may visit us when you need money. A home equity loan may be a better option if you need a large amount of cash to cover a large one-time expense, such as an unexpected medical expense.

In contrast, a home equity line of credit pays interest only on the amount borrowed, making it a good choice if you don’t need all the money right away.

Run the numbers and compare interest rates, fees and terms of current loans and home equity products before making a decision.

When you’re ready to apply for a mortgage, Credible makes it quick and easy Compare mortgage interest rates to find the right one for your unique situation.

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