So, you’re thinking about using a Home Equity Line of Credit (HELOC) to pay off your mortgage early. This is generally done to acquire cash or clear credit lines to improve the overall financial standing of one’s credit profile. With a HELOC, usually you can borrow against the value of your home, secured by a second mortgage. Below are some methods that you can use.
Many homeowners are interested in using a home equity line of credit (HELOC) to help pay off their mortgage. But there’s more to this strategy than meets the eye. In combination with a written financial plan and an honest evaluation of your personal situation, learning about this strategy can help you decide whether a HELOC is the right option for your particular financial situation.
A home equity line of credit (HELOC) is a type of financing that allows you to access a portion of the equity in your home. It works just like a credit card and can be used for anything, but it’s not secured by any collateral.
HELOCs are popular because they’re easy to get and make available a large amount of money, but they also require regular payments. You can use the money in your HELOC as a loan or as credit. If you use it as a loan, you’ll pay interest on the amount you borrow. If you use it as credit, you won’t pay interest on the amount borrowed, but you’ll still have to make monthly payments back into the account until it’s repaid in full.
Most HELOCs are offered through banks or credit unions; however, some mortgage companies offer them as well.
The process of using a home equity line of credit to pay off your mortgage is simple: you take out another loan with the same lender that holds your mortgage. Because of this, the lender is able to track how much you’ve borrowed from them and how much you’ve paid back over time.
When you make payments on this new loan, they’ll subtract those payments from what’s owed on your existing loan, which means you’re paying down both loans at the same time. You can also use funds from this new line of credit as needed—for example, if you need to make repairs or improvements on your house.
Should you use a HELOC to pay off your mortgage?
Despite changes in the housing market, many borrowers today have significant equity in their homes. If you’re one of them, you might be wondering if it makes sense to use a home equity line of credit (HELOC) to pay off your mortgage — especially if you don’t owe very much on your home. Here’s what to know about paying off your mortgage with a HELOC, and the risks that come with doing so.
Can a HELOC help you pay off your mortgage?
It’s possible to use the funds from a HELOC to help pay down your mortgage. If you have a lot of equity in your home and don’t have much left to pay on your loan, you might even be able to pay it off completely with the line of credit.
HELOCs work by allowing you to leverage your home’s equity to get funds for any goal or purpose, such as home improvements, tuition or even emergencies. Based on your equity level, you’ll be approved for a certain amount, which you can borrow some or all of during the HELOC draw period, typically 10 years. During this time, you’ll pay interest on what you borrow, at a variable rate. After the draw period, you’ll need to repay what you borrowed (with any interest owed), usually over a 20-year time frame.
Pros and cons of using a HELOC to pay off mortgage
Pros
- Chance for a lower rate: If your current mortgage has a higher interest rate and the HELOC has a lower rate, you can use the funds from the HELOC to pay off your mortgage sooner for less. This depends largely on the broader mortgage market, however — right now, rates are rising on all types of loans, including HELOCs. Compare current HELOC rates.
- Flexibility: HELOCs are a more flexible form of financing in that you can borrow only what you need versus the entire amount you were approved for. For instance, if you don’t want to use all of the HELOC funds to pay down your mortgage, you might decide to devote some of the money to home renovations or other expenses, or not borrow it at all.
- Low or no closing costs: Although HELOC closing costs generally range from 2 percent to 5 percent of the amount you’re borrowing (similar to a mortgage), the expense might be lower compared to a cash-out refinance, since you’re likely borrowing less. Some lenders even offer no-closing-cost HELOCs.
Cons
- Variable rate: HELOCs come with a variable interest rate, which means your rate will fluctuate over time based on market conditions. There’s no way to predict whether your rate will move up or down in the future, so you’ll need to be prepared to fit higher payments into your budget.
- More debt: While the HELOC might pay down your mortgage, you’d also be replacing that debt with another form of debt, and you might end up paying more interest than you would have with your current mortgage. This has implications for your credit score and finances — especially if it’s not helping you save money in the long run.
- Fees and penalties: Many HELOCs have an annual fee, and some come with a prepayment penalty if you pay it off sooner than the repayment schedule dictates.
- Flexibility: The flexibility of a HELOC might also be a downside in that it might tempt you to spend the funds impulsively or otherwise overextend yourself financially.
Example of using a HELOC to pay off mortgage
Let’s say 20 years ago, you took out a $300,000, 30-year mortgage with a 6.5 percent rate. Today, your remaining balance is $164,107, and your home is currently worth $675,000. That means you have $510,893 in equity. You’d only need to borrow about 30 percent of that with a HELOC to pay off your mortgage balance.
Is it a good idea to pay off mortgage early with a HELOC?
While you can use a HELOC to help pay your mortgage, it has limitations. HELOC lenders typically only allow you to borrow up to 80 percent (sometimes 85 percent) of your home’s value as a line of credit. Depending on your specific financials, this might not be enough to pay off your mortgage entirely.
Whatever funds you use from the HELOC also need to be repaid, usually in a repayment period of up to 20 years. If you’re close to paying off your current mortgage, you might not want to commit to repaying another debt over several more years, especially if you’re nearing or in retirement and on a fixed income.
The variable rate is also reason enough to pause. The Federal Reserve has indicated it intends to keep raising its key rate in 2022, which means loftier rates on HELOCs.
“Variable-rate HELOC customers could easily see their interest rates rise significantly,” says Herman (Tommy) Thompson, Jr., CFP, of Innovative Financial Group in Atlanta. “It’s also unlikely that the interest rate on a HELOC in 2022 would actually be lower than a mortgage acquired in the past 20 years.”
Alternative ways to prepay or pay off your mortgage
If your goal is to repay your mortgage early, you might be better off making extra payments, if possible, or as an alternative, taking out a home equity loan. When making additional payments, you might opt to pay extra in a lump sum, or begin making biweekly payments. With a home equity loan, you’ll get a fixed rate (versus a variable rate with a HELOC), which means your monthly payments won’t change. However, you’re still borrowing money to pay off borrowed money, which isn’t ideal. Consider this and a HELOC carefully if you’re looking to get rid of your mortgage sooner.
How does a partial release of mortgage work
A partial release of mortgage is appropriate when part of the mortgage loan is discharged, while the remaining balance continues to be owed. A partial release could be requested through a short sale, deed in lieu of foreclosure, or a modification. In most cases, it will be more beneficial to a borrower to obtain a total release of their mortgage loan instead of just a partial release. However, there are certain circumstances where a partial release may still be the best option. In order to understand if you would qualify for one of these programs, you will need to review your loan documents as well as contact your mortgage servicer for any updated information regarding eligibility for programs such as a HAMP or HARP modification.
A partial release of mortgage is one way you can reduce the amount of money you owe on your home, even if you are not yet ready to sell it.
A partial release of mortgage is an agreement between the borrower and lender that allows them to sell part of their home’s equity in exchange for a reduced loan balance. For example, if the borrower owes $200,000 on their house but has $100,000 in equity in it, then they could get a partial release from the lender so that they could borrow $100,000 from a third party as well as pay off their existing mortgage balance.
The process usually involves three steps: (1) the borrower agrees to sell his or her home; (2) he or she uses the proceeds from selling their home to pay off some or all of their existing mortgage balance; and finally (3), he or she signs over ownership of whatever remains after paying off their existing mortgage balance (usually 10% to 20% of what was owed).
DEFINITION
A partial release of a mortgage is a method of splitting up a piece of property that is currently under a mortgage lien. The request is that the bank officially remove the lien from part of the property, while retaining the lien that secures the remaining mortgage on the rest of the property.
A partial release of a mortgage is a method of splitting up a piece of property that is currently under a mortgage lien. The request is that the bank officially remove the lien from part of the property, while retaining the lien that secures the remaining mortgage on the rest of the property.
People find a partial release of a mortgage to be helpful for several reasons, including if they choose to sell part of their land to someone else, if they want to be able to grant full right-of-way to a utility company, or if they need part of their property to have clear title for another reason. Not everyone qualifies for a partial release, however, so it’s key to understand the conditions that could make one possible.
Definition and Examples of Partial Release of a Mortgage
A partial release of a mortgage is a way to sell a portion of a property that, as a whole, is still under a mortgage lien. A partial release of a mortgage is an arrangement you make with your mortgage lender after you’ve been paying your mortgage for at least 12 months.1 Typically, a partial release of a mortgage involves delineating which part of the property is still under a lien, and which part has clear title to be sold.
If a property owner wants to sell part of their property but still has a mortgage loan on it, they have to obtain this permission and verify that the new parcel is clear to be sold with the appropriate authority, often a county recorder’s office.
- Alternate name: partial lien release
Let’s say you purchased a 2-acre parcel of land, with your home located on the edge of the land. If you are approached by a developer a few years into your mortgage who wants to buy 0.75 acres of your land to build on, you’ll need to show your lender that selling that portion of the property won’t leave them with a 1.25 acre property that is less valuable than the remaining principal on the loan.
If they see the equity you have in your property as sufficient, they’ll issue a partial release of your mortgage. After completing the process, you’ll be free and clear to sell the 0.75 acres while the lender will still have a lien on the 1.25 acres you own, until you fully pay off your mortgage.
How Does a Partial Release of a Mortgage Work?
A key concept in your mortgage loan is the idea of loan-to-value ratio, or LTV. The higher your loan-to-value ratio, the less likely a lender is to allow a partial release. If you still have a 95% LTV, for instance, and you want to sell part of your property that amounts to 30% of the value, your lender doesn’t have enough collateral to fully secure their investment in you. After all, they’re securing 95% of your loan’s principal with what is now only 70% of the original property’s value.
Note
An LTV ratio compares the amount of a loan you’re hoping to borrow against the appraised value of the property you want to buy.
On the other hand, if you’ve paid down your mortgage to where you only owe 20% of the property’s valuation, and you want to sell 30% of your property, you are a fairly safe investment in the eyes of a lender. If you were, for some reason, to stop paying when you still had 20% of your mortgage to go, they’d be able to repossess 70% of the original property to resolve the unpaid debt.
Requirements for a Partial Release of a Mortgage
There are many eligibility requirements for a partial release of a mortgage to occur. In practice, the most requirements involve submitting documentation that proves the following:
- You’ve had the mortgage for at least 12 months, in most cases.
- Your mortgage is current, meaning your account has not been more than 30 days past due within the last 12 months.
- No borrower can be released from their liability of the loan as part of the transaction.
There will be official paperwork involved, depending on your legal jurisdiction, which your lender can help you find and submit. You’ll then often need a professional appraisal, which will yield a new current value for the whole parcel as well as values for the property after the partial release, and the value of the parcel meant to be released. Finally, the lender may require you to pay a principal reduction, essentially paying ahead on your mortgage to bring your LTV ratio to an acceptable level.1
Note
Partial releases of mortgages are not guaranteed for all mortgage loans, and some loans will have stipulations about when they are and are not eligible for partial release. For example, if you have a government-secured loan such as an FHA Loan, there will be additional requirements. FHA approval is required for certain fairly impactful partial releases, such as a partial release of more than 10% of the mortgaged property.2
Do You Need a Partial Release of a Mortgage?
The simplest reason to try for a partial release of a mortgage is when you want to sell part of your land, and if you have a partial release clause in your mortgage, it should outline the conditions under which you qualify.
However, there are other reasons why this paperwork becomes necessary, including reevaluated property lines, right of way, or easements. Even if the easement or right of way doesn’t substantially change the value of your property, it needs to be officially recorded accurately.
When a title search is conducted, such as when you’re buying a home, the title can sometimes come back with an easement on it, making it not a fully clear title. These issues have to be resolved and documented before sale is possible, so officially recording a partial release of the mortgage with your lender and the county recorder or other legal entity helps keep all changes in title to land clearly documented.
Is a Partial Release of a Mortgage Worth It?
In the case of selling a portion of your land, you’ll have to evaluate the costs of appraisals, which can range from hundreds to even a couple thousand dollars for complex cases, as well as whatever processing fee your lender has for a partial release.
Note
The total cost of fees for a partial release of a mortgage will depend on the lender. Greeneville, South Carolina-based Shellpoint Mortgage Servicing, for example, charges a processing and approval fee of $250, an appraisal fee of about $1,200, and a principal deduction fee, which will depend on your risk level.1 Depending on your situation, there may be other fees required by lenders, so it’s best to consult with a title agent or real estate attorney to decide if a partial release is worth it.
If you have reason to believe that selling the land now will help you accomplish particular goals, from freeing up capital to lowering your property tax bills long term, you will have to weigh that against the costs of the partial release.
If you are considering a partial release solely to free up cash for other purposes, a home equity loan or HELOC could be good alternatives to consider, provided your LTV is low enough. A cash-out refinance is also a method for getting home equity out in cash without dividing up your property.
Key Takeaways
- A partial release of a mortgage involves dividing a property so that part of the property no longer is connected to the obligation of the mortgage loan.
- Obtaining a partial release when you’ve paid down a substantial portion of your mortgage can allow you to sell off part of the property free and clear.
- Partial releases are also needed to maintain an accurate chain of title, showing when changes such as easements and boundary adjustments changed the rights of use for a property.
- A partial release of a mortgage has certain requirements to meet and can cost an individual thousands of dollars in fees, so it may not be the best option for everyone.
How does a refinance of mortgage work
Many people ask themselves what is a refinance of mortgage. Refinancing your mortgage is the second last step before you decide to sell your home. A refinance of mortgage gives you a new loan on top of your old one, which means that you don’t owe so much money on your house than it is actually worth, making the world seem more rosy but the fact is that a refinance of mortgage can help you get an interest rate that is lower and more fitting for your needs than the one you have now.
A refinance is the process of obtaining a new loan on your property with a different lender. The difference between the amount of money you have borrowed and what you still owe (the principle) will be paid off by the new lender, and the remaining balance will be used to pay down your current loan.
Refinancing involves several steps:
1) You must contact your current lender to obtain an appraisal of your home’s value and any other necessary documents.
2) You will meet with the mortgage broker who is helping you through this process, and he or she will explain how refinancing works.
3) Your broker will provide you with information about other lenders who may offer competitive rates and terms for your type of loan.
4) You will receive an application form from one or more lenders that shows their interest rate and other fees associated with refinancing your mortgage.
5) You will choose which lender offers the best deal, complete their application form, sign all necessary documents related to refinancing your mortgage, submit them back to their office where they send it off for processing along with documents obtained earlier during appraisal process such as proof of income/employment verification etc…
Mortgage rates have more than doubled in 2022, with the average APR on 30-year loans running near 7 percent. For most borrowers, that’s not the ideal climate for replacing a current loan with a new one.
Regardless, a refinance may be in your near future for many reasons. Here’s how the process works, the common options available to you, and what pros and cons to consider.
What is refinancing?
The term “refinance” is actually a bit misleading. When you refinance your mortgage, you’re not redoing it; you’re actually replacing your current mortgage with an entirely new loan. It could be with a different lender than the one you originally worked with to buy your home.
Refinancing has a lot of advantages: It can allow you to lower your monthly payment, save money on interest over the life of your loan, pay your mortgage off sooner and draw from your home’s equity if you need cash for any purpose.
How does refinancing a mortgage work?
The refinancing process is similar to your original mortgage application process. A lender will review your finances to assess your level of risk and determine your eligibility for the most favorable interest rate.
The new loan might have different terms — moving from a 30-year to a 15-year term or an adjustable rate to a fixed rate, for example — but the most common change is a lower interest rate.
Your new loan might also reset the repayment clock. Say you’ve made five years of payments on your current 30-year mortgage. That means you have 25 years left on the loan. If you refinance to a new 30-year loan, you’ll start over and have 30 years again to repay it. If you refinance to a new 20-year loan instead, you’ll pay your loan off five years earlier.
Refinancing comes with closing costs, which can affect whether getting a new mortgage makes financial sense for you. Before you refinance, it’s important to understand how long it will take for the costs of refinancing to pay off compared to how long you plan to stay in the home. You’ll also want to ensure you can afford the new payment and you’ll have enough equity remaining in your home.
How to find the best refinance rate
Shopping for a competitive refinance rate can save you money both upfront in closing costs and over time in monthly payments. Comparing rates and exploring the different options available to you are wise steps, as your refinanced mortgage will replace your existing loan.
Given how interest rates have spiked over the last year (and may continue into next year), you may also wish to explore a rate lock on your next mortgage. A rate lock is a guarantee that a mortgage lender will honor a specific interest rate at a specific cost for a set period. This protection can help to stabilize your monthly payment during volatile interest-rate times.
Four reasons to refinance
- You can get a lower interest rate. The biggest reason to refinance is the opportunity to lower your interest rate. Whether your credit has dramatically improved since you first secured your mortgage or the market has changed, access to a lower interest rate can save you loads of money over the course of the loan. That said, in today’s rate environment, you’re unlikely to save significantly unless you got your original mortgage at least 10 years ago.
- You can get a different kind of loan. Maybe you want to replace the uncertainty of an adjustable-rate mortgage with a fixed-rate mortgage, or maybe you’re hoping to stop paying FHA mortgage insurance by switching to a conventional loan. Refinancing gives you the chance to explore all the types of home loans to find an option that works better for your finances.
- You can use your equity to borrow more money. In addition to saving money, refinancing might be able to help you access more funds. Cash-out refinancing allows you to leverage the equity you’ve accumulated to borrow a bigger sum of money. While this adds to your debt, it can help you secure funding for big expenses — a home improvement project or college education, for example — at a relatively low interest rate.
- You can shorten your loan. If you currently have 20 years left on a 30-year mortgage, for instance, you might want to refinance into a 15-year loan for a long-term savings opportunity. Your monthly payments could go up, but you’ll pay off your home faster.
Pros and cons of refinancing a mortgage
Like most financial strategies, refinancing has both advantages and disadvantages.
Pros
- You could lower your interest rate.
- You could lower your mortgage payment and create more space in your monthly budget.
- You could decrease the term of your loan and pay it off sooner.
- You could tap into your home’s equity and take cash out at closing.
- You could consolidate debt — some homeowners use refinancing to put student loans or other debts into one simple payment.
- You could change from an adjustable-rate to a fixed-rate mortgage, or vice versa.
- You might be able to cancel private mortgage insurance premiums to avoid paying unnecessary fees.
Cons
- You’ll have to pay closing costs.
- You might have a longer loan term, adding to your costs and delaying your payoff date.
- You could have less equity in your home if you take cash out.
- You might need to deal with borrower’s remorse if rates drop substantially after you close.
- It’s not an overnight activity: The refinancing process can take between 15 and 45 days or more.
- Your credit score will temporarily take a hit.
Types of mortgage refinancing
There are many refinance options available for mortgage products, so you will want to evaluate the types of refinance available to you and consider each within the context of your unique financial situation. Your goal may be to adopt a shorter loan term, or maybe your focus is lower monthly payments. Explore the options available to decide which type of refinance best suits your objectives.
Rate-and-term refinance
This is a basic form of refinancing that changes either the interest rate of the loan, the term (repayment length) of the loan or both. This can reduce your monthly payment or help you save money on interest. The amount you owe generally won’t change unless you roll some closing costs into the new loan.
Cash-out refinance
When you do a cash-out refinance, you’re using your home to take cash out to spend. This increases your mortgage debt but gives you money that you can invest or use to fund a goal, like a home improvement project. You can also secure a new term and interest rate during a cash-out refinance.
Cash-in refinance
With a cash-in refinance, you make a lump sum payment in order to reduce your loan-to-value (LTV) ratio, which cuts your overall debt burden, potentially lowers your monthly payment and also could help you qualify for a lower interest rate. Before making a cash-in refinance, you’ll want to evaluate whether paying the lump sum would deprive you of more lucrative opportunities or needlessly drain your savings.
No-closing-cost refinance
A no-closing-cost refinance allows you to refinance without paying closing costs upfront; instead, you roll those expenses into the loan, which will mean a higher monthly payment and likely a higher interest rate. A no-closing-cost refinance makes most sense if you plan to stay in the home short-term.
Short refinance
If you’re struggling to make your mortgage payments and are at risk of foreclosure, your lender might offer you a new loan lower than the original amount borrowed and forgive the difference. While a short refinance spares the borrower the financial impacts of a foreclosure, this option comes at the expense of a hit to your credit score.
Reverse mortgage
If you’re a homeowner aged 62 or older, you might be eligible for a reverse mortgage that allows you to withdraw your home’s equity and receive monthly payments from your lender. You can use these funds as retirement income, to pay medical bills or for any other goal. You won’t need to repay the lender until you leave the home, and while the income is tax-free, it’ll accrue interest.
Debt consolidation refinance
Similar to cash-out refinances, debt consolidation refinances give you cash with one key difference: You use the cash from the equity you’ve built in your home to repay other non-mortgage debt, like credit card balances. Your mortgage debt will increase, but you will be able to pay other debts down or off entirely. Plus, you might be able to take advantage of the mortgage interest deduction.
Streamline refinance
A streamline refinance accelerates the process for borrowers by eliminating some of the requirements of a typical refinance, such as a credit check or appraisal. This option is available for FHA, VA, USDA and Fannie Mae and Freddie Mac loans.