Using home equity to pay off your mortgage? Here's what experts think

The recent surge in home prices has left the average American homeowner with about $300,000 worth of home equity. And, that amount grew by an average of $24,000 in 2023, $14,300 in 2022, $64,000 in 2021 and $26,300 in 2020.

While the home equity increases mean larger gains when you sell your home, they also grant you access to larger borrowing limits for home equity loans and home equity lines of credit (HELOCs). 

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 your newfound home equity to pay off your mortgage? Here's what experts think. 

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Using home equity to pay off your mortgage? Here's what experts think

If you use a home equity loan to pay off your mortgage, you're essentially refinancing your mortgage balance. To figure out if that's a good move or not, you'll need to do the math. 

The first step is to look at your current mortgage and take note of the following:

• Remaining principal balance
• Interest rate
• Time left in your term
• Monthly payment amount
• Overall remaining cost
• Prepayment penalties

Then, collect quotes from a handful of home equity lenders and compare them against your current mortgage. When doing so, be sure to factor in any and all applicable fees. 

"There may be closing costs involved, which increase the total cost of the loan, especially if they're rolled into the principal borrowed," said Leslie H. Tayne, Esq., founder and managing director at Tayne Law Group and author of Life and Debt. 

In addition to comparing second mortgages to your current loan, you may want to look into mortgage refinancing as well. All things equal, mortgages typically have lower interest rates than second mortgages because they require the first lien position. That said, they may have higher fees. 

Regardless, it's a good idea to collect a few mortgage refinance 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 home equity to pay off your mortgage may be a good idea if your finances are stable and you can secure a lower rate than what you're currently paying on your existing mortgage," said Tayne.

Michael Hills, a certified funds specialist, certified income specialist and financial advisor at Apex Wealth, had similar advice. 

"If the rate on the mortgage is significantly higher than current market rates, and if refinancing isn't a viable option, tapping into home equity to pay off the mortgage might be sensible," Hills said.

However, it may be more than the interest rate that wins you over. For example, if you're going through a period of lower income but expect a large increase within five years, a HELOC's structure may allow you to make much smaller payments during the 10-year draw period. Further, a fee-free second mortgage could be more appealing than a traditional mortgage refinance if you don't currently want to cover any upfront costs.

The bottom line

While home equity loans aren't typically the go-to way to refinance a mortgage, they can be beneficial in some situations. "It's important to crunch the numbers and ensure that you'd come out ahead in the long run," Tayne said. 

That said, refinancing a mortgage is a highly stakes decision so if you have any doubts or concerns, consider reaching out to a financial professional. "Consulting with a financial advisor to discuss these factors in the context of one's personal financial goals and circumstances is highly advisable," Hill said.