Equity represents how much of your home you actually own. To learn how much equity you have, subtract the remaining amount owed on your mortgage from the current market value of your home. Because equity is money that belongs to you, it’s fair to wonder, can you use equity to pay off a mortgage? In short, yes.
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.
Key Takeaways
- Equity represents the ownership share in your home that you earn after making a down payment or mortgage payments.
- You can use your equity to pay off your mortgage through a home equity line of credit (HELOC), a home equity loan, or by refinancing.
- With a home equity loan, refinance loan, or a HELOC, your home acts as the collateral.
How To Use Home Equity To Pay Off a Mortgage
When you use equity to pay off a mortgage, you are essentially refinancing your mortgage loan because you’ll still have 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 will still 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.
note
Be cautious when borrowing in this way, because your home will act as collateral on the new loan. If you can’t pay it back, you risk losing your home.
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.
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Unlike with a home equity loan, a HELOC won’t give you a lump sum of cash upfront. You only borrow what you need (usually by check or a credit card connected to the HELOC), which is convenient because you don’t have to pay interest on the remaining funds you don’t use.
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 could potentially save you money and make it easier to fully pay off your home faster.
Frequently Asked Questions (FAQs)
What happens when you pay off your mortgage?
When you pay off your mortgage, the lender releases the lien on your home and returns the original note to you. There can be a delay between when you pay off your mortgage and when the lender releases the lien.
How quickly are you allowed to pay off your mortgage?
You can pay off your mortgage as quickly as you’d like, but some lenders may charge a penalty fee for paying off your mortgage early. You may save more money on long-term interest by paying this fee, but it’s worth checking with your lender to see if it charges this penalty and how much the prepayment penalty is. Sometimes, this penalty only applies to the early years of your mortgage.
How do I calculate how much equity I have in my home?
Home equity represents how much of your home’s value you actually own. To calculate your home equity, determine the current market value of the home, then subtract what you still owe on your mortgage from that value.
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