Using home equity to pay off your mortgage? Here are the pros and cons
Do you own your home? If so, you may have some $299,000 in equity at your fingertips. That's the average amount of equity American homeowners have. And, those homeowners can take advantage of an average of $193,000 of that equity and maintain a healthy, 20% stake in their homes.
Moreover, when you borrow against your home equity, either with a home equity loan or home equity line of credit (HELOC), you can use the money you borrow for any purpose you'd like. You could even use it to pay your mortgage off.
But, does using home equity to pay off your mortgage make sense?
Whether or not it's wise to use your home equity to pay your mortgage off depends on multiple factors. But, before you determine whether doing so makes sense or not in your unique situation, it's important to consider the pros and cons.
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Using home equity to pay off your mortgage? Here are the pros and cons
Here are the pros and cons to consider before using your home equity to pay off your mortgage.
Pro: You'll eliminate your biggest monthly bill
If you're like most Americans, your mortgage represents your biggest monthly bill. However, if you use your home equity to pay off your mortgage, you could potentially eliminate that bill. And, depending on the details of your mortgage and the home equity loan you use to pay it off, doing so could make a difference in your overall monthly expenses.
For example, if you've paid off a portion of your mortgage, the total value of the home equity loan or HELOC you need to pay off the remainder of your balance will be lower than your starting mortgage value. As such, you may qualify for lower monthly payments by paying your mortgage off with your equity.
Tap into your home equity to say goodbye to your biggest monthly bill today.
Cons: You'll still have a monthly bill
Even if you pay your mortgage off with your home equity, you won't be completely eliminating the monthly cost of your home. Instead, you'll be trading your current mortgage payment for a home equity loan or HELOC payment. So, you'll still have a monthly bill to pay.
Pro: You can delay principal payments
If you use a HELOC to pay off your mortgage, you could delay principal payments. That's because HELOCs typically start with a draw period that lasts anywhere from five to 10 years. While your loan is in the draw period, you'll need to make interest-only payments. But you won't typically be required to pay anything toward your principal HELOC balance until the repayment period begins (following the draw period). This could lead to meaningful monthly savings for the first several years after you pay your mortgage off using a HELOC.
Con: You may be penalized if you prepay
Some mortgage companies charge prepayment penalties. These penalties incentivize consumers to pay their mortgages slowly, giving lenders the opportunity to collect more interest than they would if homeowners were to pay their mortgages off too quickly. So, if you use your home equity to pay your mortgage off, you may need to add the cost of this penalty to your home equity loan. Prepayment penalties can be as high as 2% of your mortgage balance.
Pro: You may still have leftover equity
Depending on the amount of money you owe on your home, and the amount of equity you have available, you may have leftover equity after paying your mortgage off. You could use this equity to make home repairs or renovations, pay off high interest debt or cover any other large expense that you see fit.
Just keep in mind that your monthly payments will reflect the amount of money you borrow. So, if you tap into more equity than you need, you may end up with a higher monthly payment than you want.
Cons: Your payments may change over time
While home equity loans typically come with fixed interest rates and payments, HELOCs usually offer variable rates and payments. So, if you choose the latter, your payments may change over time. And changes to your monthly payments could prove burdensome.
After all, if interest rates increase at any point during your payment period, you could be faced with higher monthly payments. Moreover, variable payments can be more difficult to budget for. So, only choose the HELOC option if you can withstand potentially higher payments in the future.
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The bottom line
Using your home equity to pay off your mortgage may be a wise idea. But doing so comes with pros and cons to consider. Paying your mortgage off with your equity could help you eliminate your biggest monthly payment, give you an opportunity to delay principal payments and put some leftover equity in your pocket to cover other expenses with. On the other hand you'll still have a monthly payment to make, you may be penalized if you pay your mortgage off early, and your payments may change over time if you use a HELOC to pay off your mortgage.
If you've weighed these pros and cons and decided that it's best to use your equity to pay your mortgage off, compare leading home equity borrowing options now.
