How to Use Home Equity Loans to Pay Off Your First Mortgage
In many cases, refinancing your first mortgage into another mortgage product makes the most sense, but home mortgages are not your only refinance options. With the flexibility of home equity products, you can now pull cash out of your home when you need it most and pay off your existing mortgage at the same time. Before you decide if this is a valid refinance alternative for your situation, make sure you run all the numbers concerning interest rates and fees. Using a home equity loan to refinance your mortgage may save you thousands of dollars in closing costs.
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Instructions
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Compare your alternatives. In some states, once you turn your first mortgage into a home equity loan, lenders must always consider it an equity deal. To decide if this tradeoff is worth it, shop the rates of both mortgage refinances and home equity loans in your area. Using the good faith estimate of settlement costs provided, you can determine how much money you'll save in closing costs and origination fees.
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Visit with a home equity lender. Depending on the equity laws in your area, paying off your first mortgage with an equity loan may not be an option because of your home's worth. For example, if your state places a maximum home equity loan amount at 80 percent of the home's fair market value and your home appraises at $200,000, your maximum legal loan is $160,000. If you owe more than this on the first mortgage, you must come up with the difference out of pocket to proceed with this refinance option.
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Apply for your home equity loan. Once you determine adequate usable equity exists in your property, submitting the application will start the appraisal and title search process. You will not receive a definitive approval until the lender verifies no issues with these aspects, but you will get a credit approval or denial once the lender reviews your credit history.
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Request a mortgage payoff statement from your current mortgage company. This is different from the normal statement you receive each month. Your lender will calculate the accrued interest through the date you provide so that your home equity lender may pay the full amount without complications when funding your equity loan.
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Close your home equity loan. Once you sign the paperwork, your lender can fund your loan. The lender will cut a check to your mortgage company to repay the full amount and provide you a check for the difference if you borrowed money in excess of the mortgage amount. If your state requires a rescission period---time for you to cancel the loan after closing---this must expire before your lender funds the loan.
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Tips & Warnings
Remember, if you have a large current mortgage balance and plan to stay in the home, a mortgage refinance is often a better deal than using a home equity loan. If you need access to your available equity, you can apply for a separate home equity loan or line of credit after you close your refinance.
Don't forget to find out if your lender requests the mortgage payoff statement on your behalf.
Avoid requesting the mortgage payoff statement too early in the process because some mortgage companies charge a fee for each request.
