Can I Use a Home Equity Loan to Pay Off a Mortgage?

Are you trying to find out if you can use a home equity loan to pay off a mortgage? We know this can be a confusing topic. That’s why we’re here to help. This article will explain:

•  What a home equity loan is.
•  How much you can borrow with a home equity loan.
•  The true cost of a bad home equity loan.
•  How to use a home equity loan to pay off your mortgage.
•  How to deal with other problems related to home equity loans.

Every month, more than 6,900 people visit our website for advice on secured loans. We understand that these matters can be tough to grasp.

But don’t worry, we’re here to help you make the best decision for your situation.

Can I use a home equity loan to pay off my mortgage?

It is possible to use a home equity loan to pay off your existing mortgage. Sometimes these loans have a lower interest rate than your existing mortgage, meaning you could save some money by using a home equity loan to pay off your mortgage. 

Some people who decide to clear some or all of their mortgage using home equity, do so with a home equity loan, while others use a home equity line of credit, also known as a HELOC. 

Paying off a mortgage with a home equity loan

You might be able to take out a home equity loan and access a lump sum to pay off some or all of your existing mortgage. If the interest rate is lower on the home equity loan than your mortgage, you could save on monthly repayments.

These loans usually have a fixed interest rate so it’s not difficult to calculate against other fixed-rate mortgages. But you should take into account other fees, such as a home equity loan closing fee which can be around 2-5% of the total loan amount.

You may also want to consider using a HELOC to pay off your mortgage. A HELOC is also a loan based on your home’s equity, but it is provided as revolving credit not dissimilar to the way you access credit from a credit card.

The HELOC would be used to make frequent payments towards an ongoing mortgage. This is beneficial if the interest rate is lower than your current mortgage and any home equity loan products. However, it includes an element of risk because HELOCs typically have a variable interest rate that could increase.

Can you pay off a home equity loan with another home equity loan?

If you used a home equity loan to pay off a significant amount of your mortgage or completely pay it off, you might be looking for further ways to reduce your payments. But it would be very difficult to use another home equity loan to pay off an existing home equity loan unless the initial loan was only for a small percentage of your home equity. It will all depend on how much equity is left in your home whether this is possible. 

How much can I borrow with a home equity loan?

Most lenders will allow you to borrow up to 80-85% of the equity in your home. For example, if you have £200,000 home equity and you meet the lender’s criteria, you will usually be able to borrow £160,000 to £170,000. Some lenders may let you borrow a little bit more.

Can you take out a home equity loan on a paid-off house?

You might be able to take out a home equity loan on a home that you have already paid off with no existing mortgage. Lenders providing a home equity loan on a property without an existing mortgage may be more inclined to offer lower interest rates due to decreased risk.

If you were unable to repay the home equity loan and the lender decided to peruse foreclosure (forcing you to sell your home), there would be no other lenders involved and they would more easily get their money back. Thus, you might be able to access a lower interest rate when releasing equity from a home you own outright.

However, homeowners can still be denied home equity loans even when they have no mortgage due to elements of their financial profile.