When You Cant Pay Back Your Loan
Sometimes, even if youre granted a loan, you may encounter financial problems later on that make it difficult to pay it back. Though losing your home is a risk if you cant pay back your home equity loan or line of credit, it isnt a foregone conclusion. However, even if you can avoid losing your home, you will face serious financial consequences.
If the real estate market takes a dip, those with higher combined loan-to-value ratios run the risk of going underwater on their loan.
Choose The Right Loan
Choose a home equity loan that offers you regular installment loan terms. That way you will be paying a minimum amount on both the principal and the interest each month. Talk to your lender about credit insurance. This may include life insurance, disability insurance and unemployment insurance. Credit life insurance is set up to pay off your home equity loan if you die. Discuss other options with your regular insurance agent, as a traditional life insurance policy may be cheaper yet provide the same benefits.
When Is A Heloc Better Than A Home Equity Loan
A HELOC is a better option than a home equity loan if:
- You need a revolving credit line to borrow from and pay down variable expenses.
- You want a credit line available for future emergencies but don’t need cash now.
- You are deliberate in your spending and can control impulse spending and a variable budget.
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Interest Rates And Fees If You Refinance Your Home
The interest rate on the refinanced part of your mortgage may be different from the interest rate on your original mortgage. You may also have to pay a new mortgage loan insurance premium.
You may have to pay administrative fees which include:
- appraisal fees
Your lender may have to change the terms of your original mortgage agreement.
Draw And Repayment Periods
HELOC terms have two parts. The first is a draw period, while the second is a repayment period. The draw period, during which you can withdraw funds, might last 10 years, and the repayment period might last another 20 years, making the HELOC a 30-year loan. When the draw period ends, you cannot borrow any more money.
During the HELOCs draw period, you still have to make payments, which are typically interest-only. As a result, the payments during the draw period tend to be small. However, the payments become substantially higher over the course of the repayment period because the principal amount borrowed is now included in the payment schedule along with the interest.
It’s important to note that the transition from interest-only payments to full, principal-and-interest payments can be quite a shock, and borrowers need to budget for those increased monthly payments.
Payments must be made on a HELOC during its draw period, which usually amounts to just the interest.
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Heloc Or Home Equity Loan Penalties
For HELOCs, these penalties are called early closure fees. And theyre most likely to be troublesome if you only recently signed up for your loan.
In short, youre likely to be fine using a cash-out refinance to pay off a HELOC if you didnt just take out either your first or second mortgage.
If one or both are very recent, you need to work out the exact costs and feed them into your calculations. In some cases, they can undermine the economic basis of a refinance.
Increase Your Monthly Payments
Perhaps the most straightforward and simple approach to paying back your home equity line of credit faster is to pay more than the minimum required amount on a monthly basis. Any additional funds made towards your credit payments reduce the principal on your debt. This, in turn, reduces the amount of interest generated from your loan and ensures that you can pay back the money you owe as quickly as possible.
This straightforward strategy lets you establish your own payment amounts that do not strain your budget. Although paying your monthly minimum is essential, taking a proactive approach and channeling additional funds towards this debt is at your discretion. You can skip a month or two if money is tight or add a more substantial amount to pare down the principal with a Christmas bonus or tax return if you choose.
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Hanging On To Some Kinds Of Loans Makes More Sense Than Paying Them Off
A little bit of debt can be a good thing. If you approach borrowing strategically, you can eliminate higher-interest debt that may be weighing you down, lock in low-interest loans and use the extra cash to boost your investments for retirement or contribute to an emergency fund.
Now is a particularly good time to scrutinize the debt side of your ledger. Interest rates on most kinds of loans should remain low even as the Federal Reserve continues to target higher short-term rates, which would increase payments on many variable-rate debtsnotably, most credit cards and home-equity lines of credit, as well as some private student loans. Below, we’ve arranged the most common types of debt roughly in the order of payoff priority. Generally, if you have a FICO credit score of about 740 or 750 or higher, youll qualify for the best rates on any type of loan. But some lenders will offer low rates to borrowers with scores closer to 700.
Unless you’re milking a 0%-introductory-rate offer, there’s a good chance that any credit card debt you are carrying is costing you a bundle, making it a prime candidate for accelerated payments. Interest payments don’t qualify for a tax deduction , and the average rate on cards that charge interest is 13.9%, according to the Federal Reserve.
How Does A Home Equity Loan Work
A home equity loan, also known as a second mortgage, enables you as a homeowner to borrow money by leveraging the equity in your home. The loan amount is dispersed in one lump sum and paid back in monthly installments. The loan is secured by your property and can be used to consolidate debt or pay for large expenses, such as home improvements, education or purchasing a vehicle. Both the interest rate and monthly payments are fixed, ensuring a predictable repayment schedule.
Here are some of the most commonly asked questions.
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Thoughts On Using A Home Equity Loan To Pay Off Your First Mortgage
I owe 21k on my condo and have 100k HELOC. Will BOFA give me a Home Equity Loan for such a small amount. Right now, if I use my HELOC I will save $40 per month and the additional interest.
Cant you just replace the HELOC with another one and use the amount you need to pay it off?
You could but both will be tied to prime. .. Where is the benefit?
I have a mortgage loan for 100k, 4.0 fixed rate for 30 years and I have 50k in cash.
My plan: I will get a home equity loan for 50k matching the saving of 50k I have to pay off my mortgage in full. The equity I will have will be 30 years, fixed rate at 5.3. It is a higher rate, but it is tax deductible without a closing cost. it is like refinancing without playing closing cost and saving more money in tax deduction. 🙂
I have a variable loan now that changes annually. Currently it is at 3.75%interest. We bought our home in late 2004 and our current mortgage balance is $340K. Our house is valued at $650K. Rates are rising and each year we are worried about our next annual payment. Can we take out an equity loan on our property to pay off our mortgage? Can we? Would this be best? Can we get a 15 year equity loan? I like the possibly of no closing costs compared to refinancing??
We have a mortgage 50K have 80K in equity would paying are home off with equity loan save us money our loan is for 15 years?
Save About $6600 In Interest And Enjoy A Lower Monthly Payment
If you let your 15-year loan play out as scheduled, youd pay roughly $104,000 in interest over the full term.
However, if after 10 years you took out a five-year home equity loan with a rate of 3.25% for the remaining balance, roughly $87,000, youd save some cash and lower your monthly payment for the remaining five years.
In all, youd save about $6,600 by using the home equity loan to pay off your existing first mortgage.
Additionally, youd have a slightly lower monthly paymentcloser to $1,573, as opposed to the original $1,688 a month you were previously paying.
It might not seem like much, but many of these home equity loans dont have closing costs, or if they do, theyre minimal. And its pretty easy to apply for one.
If you wanted to pay off your mortgage even faster, you could simply make larger payments on the home equity loan to match your old payment, or pay even more. Just watch out for any prepayment penalty.
In summary, this is a relatively simple way to reduce the interest expense on your first mortgage, without the risk of interest rate fluctuations that are common with HELOCs.
Just do the math to ensure it actually makes sense and is worth your time and energy. For those still in the early stages of their mortgage, you can make extra payments to principal each month to reduce your interest expense and shorten your term.
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The Benefits Of Paying Off Car Loans With Helocs
For homeowners who are thinking about the best tools for paying off car loans, HELOCs, or home equity lines of credit, can be good options. HELOCs offer a number of benefits to a potential borrower, and attention to these tips can help you get the best loan for driving that new or used vehicle off of the dealer’s lot.
Why You Should Close A Heloc
- Sometimes, a lender will charge annual fees for open lines of credit. If you pay off your HELOC early and dont want to pay the annual fees, closing the line of credit can be a good idea.
- You cannot sell your home, get a second mortgage, etc. while the HELOC is open. The line of credit includes a lien against your property, which must be released before you can transact on the property.
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Comparing A Heloc To A Home Equity Loan Or A Mortgage Refinance
Many websites offer a wealth of unbiased financial information and one post takes a look at how these three credit options stack up. First and foremost, one needs to determine which choice is best for his/her circumstances and the answer to that will vary, depending on specific circumstances. While a second mortgage may be the best option for one individual, another might find that a line of credit suits his needs best.
Determining which of the three choices would best benefit one’s situation depends on how much equity one has in the home versus how much the individual wishes to borrow. Just as important is whether the individual wants a fixed or variable interest rate for reasons previously discussed. The borrower will also want to factor in the current mortgage’s interest rate.
Apply For Your Heloc Consolidation Loan
If you have decent equity and credit, using a cash-out refinance to consolidate a HELOC is probably easier than you think.
Shop current rates with top lenders and get started on your goal to finally retire that home equity loan.
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Can You Pay Off A Heloc Early
Yes, you can pay off a HELOC early. There are no associated prepayment penalties with these loans.
The best time to pay off the principal of your loan is during the draw period. You are only required to pay the interest during this time, but paying extra toward your principal as well during this period can help you avoid paying more during the repayment period.
What Documents Are Needed
Getting a home equity loan is a thorough process. Youll need to pull together the following information and documents:
- Property information .
- Estimated property value.
- Personal information .
- Employment and income information.
- Debts such as auto loans, student loans, credit cards, current mortgage and home equity accounts.
- A completed and signed Internal Revenue Service Form 4506T.
- Copy of your most recent pay stub that reflects earnings for the past month and year to date.
- The most recent two years of W-2 forms from your employer.
- Self-employed borrowers will need the most recent two years of personal IRS tax return documents , the most recent two years K-1s from the partnership, LLC or S Corporation.
- Proof of homeowners, hazard and flood insurance.
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How You Receive Your Funds
Cash-out refinance gives you a lump sum when you close your refinance loan. The loan proceeds are first used to pay off your existing mortgage, including closing costs and any prepaid items any remaining funds are yours to use as you wish.
Home equity line of credit lets you withdraw from your available line of credit as needed during your draw period, typically 10 years. During this time, youll make monthly payments that include principal and interest. After the draw period ends, the repayment period begins: Youre no longer able to withdraw your funds and you continue repayment. You have 20 years to repay the outstanding balance.
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Why You Shouldnt Pay Off Your Mortgage Fully
The single biggest reason to keep your home loan account open is easy access to funds so you can:
- Increase the value of your property by .
- Purchase an or your next home and claim where you can.
- given that are cheaper than personal loans and credit cards. However, be wary of compounding interest as with debt consolidation the term is extended albeit at a cheaper interest rate.
- Build your super and save for retirement.
- A home loan is often the cheapest credit you can get as such it should be the last debt you pay off after your other debts such as credit cards, personal and business loans.
- The mortgage interest repayments for rental properties are tax deductible.
- An added benefit of safekeeping of the property title with the bank.
Unless youre close to retirement, is better off being invested and earning a return.
There are several other reasons why you shouldnt close your home loan account:
Do You Have Enough Money In Your Offset To Pay Off The Home Loan
Once youve saved up enough money in your offset thats equal to your home loan balance, you have a choice you can either continue to make your repayments towards the principal or use the funds to invest or pay off the mortgage completely.
There isnt a right or wrong option here, lets look at a couple of options.
Lets say Dave and Lisa have a mortgage of $500,000 at an interest rate of 4% and are committed to paying off the mortgage.
In 10 years, they would have paid off roughly $100,000 off their home loan.
However, lets say they borrowed money using the equity in their home to purchase an investment property worth $500,000.
In 10 years, even with a conservative growth rate of say 7%, their investment property will have increased in value to a cool $1 million.
They are better off by $500,000 simply by investing instead of paying off their home loan.
The take away here is that if you had waited to pay off your home loan by 10 years, you are missing out on a decade worth of capital growth.
Alternatively, if they put $100,000 in their offset account, most of the couples monthly repayment of $2,387 goes towards paying off the principal quicker.
They would have saved $172,000 approx. in interest over the life of the home loan and paid off the loan earlier by 6 years.
Both of these options have their own benefits and drawbacks and what suits you best will depend on your financial goals, risk appetite and retirement plans.
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