I was wondering: why not take a home equity to pay off mortgage?
April 30, 2010 by
Filed under home equity rates
We have a $200,000 mortgage on a house that is worth $300,000.
I was thinking about refinancing, but noticed that a home equity line has a lower interest rates APR.
If I take the equity line and pull out the full amount they will give me (the bank told me it is up to 80% of the value of the house) and turn around and pay off the mortgage, wouldn’t that be cheaper for me ?
Where is the caviot in this theory?
Because the home equity rate is variable and can go up.It’s a risk when rates rise (which they arent right now)
Most home equity loans have a shorter time frame
Just refinance – and its a great time too !!!!!!!
Sounds good but I’m sure there is something in the Ts and Cs that doesn’t allow this. Maybe the payoff period for the equity line is shorter. Read the small print. No bank is going to let this happen.
If you owe 200K on a 300K house, the MOST you could expect to borrow on a 2nd loan is the amount of your equity – 100K. How are you going to pay off a 200K mortgage with 100K?
It’s kinda like robbing Peter to pay Paul isnt it? I find it very hard to believe that a home equity loans rate is cheaper than a refinance. It may be an intro rate. You have to remember that a term on a home equity loan is shorter than a mortgage traditionally. I think this is a very bad move. Just keep paying down your mortgage.
You will only be able to borrow up to $40,000 on your equity line.
Value of home $300,000 x 80% = $240,000
Subtract mortgage debt $240,000 – $200,000 leaves amount of potential equity line: $40,000
You can’t pay off a $200,000 loan with $40,000
And most home equity loans are variable, which means that the interest rate will increase. Also read the fine print, you may have been offered an introductory rate which is extremely low and will skyrocket when the introductory period ends.
Finally, when was the last time your house was actually appraised? If more than 90 days, it may not appraise for as much as you think it will. What you paid for your house has no bearing on its current value, as many of your fellow Americans are finding out.
Good luck and do yourself the favor of taking the loan papers to a CPA or lawyer so that you find out exactly what you are getting yourself into.
Actually, depending on your financial situation, using a line of credit instead of a traditional mortgage can be a wise financial strategy.
When using a line of credit, you only pay interest on the money you borrow. In addition, your mortgage interest rate is probably higher than the interest that you savings account earns. So, if you borrow money from your home and then put that money in your savings account, then you’re actually losing money. It would make more sense to empty out your savings account and pay down your mortgage. Then, if you need money, you could draw it from your credit line.
By the way, the IRS defines equity a little different from everyone else. Therefore, a true equity line of credit has different tax consequences than a “standard” mortgage. However, there is absolutely no difference in tax consequences in a “traditional” first mortgage than there is for a Line of Credit in the first position if the Line of Credit and the “traditional” mortgage are for the same amount. (Consult your accountant.)
Here’s the one real problem with this strategy. Generally speaking, real estate values are trending down at this point. Just because your home is worth $300k today doesn’t mean it will be worth $300k tomorrow. Lines of credit can be frozen. Therefore, if you take all of the money out of your bank account today and pay down your mortgage, and the Line of Credit gets frozen tomorrow, you won’t have any reserves.
A Home Equity Line less than a 1st Mortgage??? Sign me UP! I’ve never seen that before. Best to refinance your current 1st mortgage at the lower rates that are available now. I know a couple of loan officers that offer in the 5+percent range which I haven’t seen for quite some time. I’m an escrow officer and I see everyones loan documents when I close them and it’s really low right now. Depending upon credit and stuff of course. My friends just took a 15yr mortgage refi out at 5.25%!!!! There might even be better deals out there for you. I’d shop around. Let me know if you need any phone numbers for loan officer than can show you your options. I’ve seen loans for more than 80% of the value.
That is some pretty good thinking, but may not work too well like that. I would like to share with you how to use a home equity line to payoff your house in 1/3 to 1/2 the time.
This is my story, I recently just purchased a house for 213,000, (360 months remaining) and am planning on paying it off in 10 1/2 years, without making more money or changing my lifestyle.
Here is how it works… The program that I am talking about is called united first financial (or U1st). It is a software program that prompts you to pay more towards your principle during the year. (as long as you pay your monthly interest, everything else is added to principle). The idea behind it is using a home equity line of credit (heloc) in place of your checking and savings account. By doing this you are canceling interest on your heloc by your income coming into it. Its only charged on a daily average balance so you want to keep as much money in heloc as you can.
(Example… 3000 on line already, pay your bills for that month and it takes the balance up to 8000, then you deposit your money which drops it back down to 2500.00, with the daily average balance you’ll only pay on the 2500. and not the 8000. Month 2 you have 2500, pay bills of 4000 again that puts you at 6500, but once again your income going into will bring it down to 1000, only paying interest on that amount)
Well once you let your income work down your heloc, it wont allow you to put more money than you have drawn, so you transfer over a couple thousand to your first mortgage. Then put your income back in, repeating the process a few times a year…resulting in 1/2 to 1/3 the time frame to payoff your house. Also saving hundreds of thousands in interest. Any other questions feel free to check out this site.