Learn more about your options for using your equity to pay off your home loan, how this process works, and whether it’s a good idea for your situation.
How To Use Home Equity To Pay Off a Mortgage
When you use equity to pay off a mortgage, you essentially are refinancing your mortgage loan because you’ll still owe money, with your home as a lien. When you take out a HELOC or a home equity loan, you will have two loans: the original mortgage and the new loan. You can use the second loan (the HELOC or home equity loan) to pay off the first loan, but you still will have to pay off the second loan.
Home Equity Loan
A home equity loan makes it possible to borrow money from the equity you have built up in your home. Once you take out the loan, you’ll be given the borrowed amount in a lump sum. That said, most home equity loans come with fixed interest rates, which mean your payments will remain consistent and easier to budget for. You can choose to use the home equity loan to pay off your mortgage loan—if you have enough equity to afford that, and if the home equity loan has a lower interest rate than your mortgage. If that’s true, this move may be able to save you some money.
Home Equity Line of Credit
You also can use a HELOC to tap into equity and pay off your mortgage loan. A HELOC works similarly to a credit card, as it is a revolving form of credit. You can withdraw as much as you need to pay off your mortgage (if you have enough equity to do so) and can then focus solely on paying off the HELOC. Again, if you can get a better interest rate with a HELOC, you can save money—but you need to make all of your payments or you risk losing your home.
Cash-Out Refinance
You also have the option to refinance your home loan with a new loan. You would do this with a cash-out refinance loan, which involves trading the equity you already have in your home for cash. You can use the cash you receive to pay off the remaining loan balance.
Pros and Cons of Using Home Equity To Pay Off Your Mortgage
Pros Explained
May secure a lower interest rate: If you can get a lower interest rate through a home equity loan, HELOC, or a cash-out refinance loan, you can save. Potentially helps pay off your loan faster: The lower your interest rate is, the less your monthly payments will be, which makes it easier to pay off a loan early.
Cons Explained
Puts your home ownership at risk: When you take out a HELOC or home equity loan, your residence is the collateral; defaulting on the loan could cost you your home. Closing costs can add up: You may need to pay sizable closing costs for the act of taking out a new loan to tap into your equity.
Should You Use Home Equity To Pay Off Your Mortgage?
Whether using home equity to pay off your mortgage makes sense depends on your unique situation and risk tolerance. If you can access enough equity to pay off your mortgage and can manage the new loan payments, then using your equity to do this potentially could save you money and make it easier to fully pay off your home faster. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
