Author Topic: Pay off Mortgage with Home Equity Loan  (Read 6956 times)

Patryn

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Pay off Mortgage with Home Equity Loan
« on: January 25, 2013, 12:17:48 PM »
Hello Everyone,
Iím writing this out to determine if it would make financial sense to pay off my current mortgage with a home equity loan.

Current Mortgage: 15 Year Fixed @ 4.5% APY.  I have paid a lot towards principle and have approximately $60,000 left on the loan.  If I didnít make any more prepayments it would be paid off in 5 years 4 months.  The monthly principle and interest is $1,101.59.

Home Equity Loan Option: 5 Year Fixed @1.99 APY for $60,000.  This would be used immediately to pay off my mortgage.  My new monthly payment would be $1,051.40.  This would be through the Pentagon Federal Credit Union.  It is no closing costs except for a possible appraisal.  If the loan is paid off before 24 months I would have to refund the closing costs.

To me this seems like a ďno brainerĒ and is an obvious choice to apply for the home equity loan.  My plan would be to stop making prepayments and then pay the home equity loan in full in 2 years and being completely debt free.

I will be paying too little in interest to make the tax benefits of the mortgage be more than the standard deduction so that isnít a concern.  My one concern is about prepaying the Home Equity Loan.  From my reading it seems that if you prepay you arenít really prepaying the same way youíd prepay a mortgage.  It seems that your prepayments just go towards future payments so your payment due dates just keep getting delayed.

Does anyone know the exact specifics of prepaying a home equity loan?  Am I missing anything or is this a great deal?

Also, I know investing in the stock market would most likely make more money but I am debt adverse and once I am debt free I will be investing all extra money.  Thanks!

tooqk4u22

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Re: Pay off Mortgage with Home Equity Loan
« Reply #1 on: January 25, 2013, 12:25:53 PM »
If your plan was to pay it off in that amount of time then it sounds good - in fact at 1.99% I would keep it the whole five years. 

arebelspy

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Re: Pay off Mortgage with Home Equity Loan
« Reply #2 on: January 25, 2013, 12:31:00 PM »
A lower monthly payment due to a lower interest rate, 4 months less of payment, all at at no cost except some of your time?  You'll save approximately $7,417.76 over the next 5 years (if you don't prepay any of it).

Depends how much your time is worth, but you'll probably be saving in the neighborhood of a few thousand dollars per hour.

Sounds pretty obvious, whether you pay it off in 2 years or 5 years.
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Patryn

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Re: Pay off Mortgage with Home Equity Loan
« Reply #3 on: January 25, 2013, 12:39:42 PM »
I appreciate the super quick response.  I thought it was a great deal too but sometimes things are too good to be true.  Glad this time it actually is true!

Karl

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Re: Pay off Mortgage with Home Equity Loan
« Reply #4 on: January 25, 2013, 01:13:00 PM »
I found this on-line

"Traditional mortgages in the United States are usually non recourse loans, while mortgages in countries such as Canada are generally recourse loans. "Nonrecourse debt or a nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable." A HELOC may be a recourse loan for which the borrower is personally liable. This distinction becomes important in foreclosure since the borrower may remain personally liable for a recourse debt on a foreclosed property."

I agree that the benefit of paying off the mortgage at a lower rate, and the cost savings, is huge.  On the other hand, I simply suggest thinking carefully about fine print differences that may exist between the two types of loans under consideration.


arebelspy

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Re: Pay off Mortgage with Home Equity Loan
« Reply #5 on: January 25, 2013, 01:47:18 PM »
I'd imagine the OP has enough equity that this wouldn't be an issue - even in a disaster where they couldn't make their payments, they could sell rather than have to foreclose.

But it is a good thing to keep in mind, thanks for the reminder.
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tooqk4u22

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Re: Pay off Mortgage with Home Equity Loan
« Reply #6 on: January 25, 2013, 02:11:25 PM »
"Traditional mortgages in the United States are usually non recourse loans, while mortgages in countries such as Canada are generally recourse loans.

This is not true across the board.  There are some states that have variations such as California,, which has the single action rule that says lenders can either go after the real estate (foreclosure) or the borrower (effectively recourse) for loan repayment.  So if a property was 50% underwater and the borrower had said 3x the loan in cash and investments then the lender could go after that.

In most states the lender can go after the house and the other assets of the borrowers - although retirement assets are usually shielded.

In practice though this doesn't happen because in reality if one is losing one's house then it is unlikely they have other resources of any materiallity. 

James

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Re: Pay off Mortgage with Home Equity Loan
« Reply #7 on: January 25, 2013, 02:24:58 PM »
I would absolutely love to walk away from my house right now, it would save $35-45,000 at least.  Probably wouldn't ethically anyway, and I'm in a state where they would come after me for the money anyway so it's not an option...  :)


That has nothing to do with your great catch at finding a rate at less than half you are paying now for a huge chunk of money!  Being able to pay in advance is actually kind of nice, that way once you have paid forward a bit, you can always not pay if some hardship comes up.  On the other hand, it might be that you will pay full interest instead of paying less interest as you pay it off quickly.  So if you took the loan for $60,000, paid off $20,000 a month later, are you paying interest on the equivalent of $40,000?  Or still paying interest as if it was just under $60,000?  It's possible they have calculated the interest over the course of the loan and even if you pay ahead you aren't saving interest on the amount you have paid off.  Something to consider if you hope to pay it off quickly.
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Patryn

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Re: Pay off Mortgage with Home Equity Loan
« Reply #8 on: January 25, 2013, 02:43:39 PM »
Yeah that was my one concern.  If I prepay the home equity loan it doesn't seem to behave the same as prepaying a mortgage.  I wonder if at two years I request the loan payoff document and I'd have to pay the full amount of the interest over 5 years.

Able was I ERE

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Re: Pay off Mortgage with Home Equity Loan
« Reply #9 on: January 25, 2013, 04:25:57 PM »
Yeah that was my one concern.  If I prepay the home equity loan it doesn't seem to behave the same as prepaying a mortgage.  I wonder if at two years I request the loan payoff document and I'd have to pay the full amount of the interest over 5 years.
No.  It's a simple interest loan.  You only pay on outstanding balance. 

Have a pen fed hel and have paid over a year in advance.  Happy to share  the payment schedule if that helps.

smedleyb

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Re: Pay off Mortgage with Home Equity Loan
« Reply #10 on: January 25, 2013, 04:46:27 PM »
First off, those are amazing HELOC terms Patryn.  I can see the motivation to put that credit line to work.

Honestly, if you can knock off the regular mortgage in 2 years, I would be inclined to just hammer away at the first at 4.5%.  I think the total interest savings (in two years) is about $2K, which is indeed money in the bank.

My only concern is if something happens that hinders your ability to make payments.  There is little doubt keeping the first open and using the HELOC as backup or an emergency fund gives you greater flexibility going forward (I wonder too how your credit score will be affected by having such a high utilization rate of credit).

Also, have you thought about getting into an investment property?  That HELOC would be a great starter fund for such an endeavor.

But if you feel comfortable with all the angles, go for it. 

Good luck!

smedleyb

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Re: Pay off Mortgage with Home Equity Loan
« Reply #11 on: January 25, 2013, 04:48:25 PM »
I would absolutely love to walk away from my house right now, it would save $35-45,000 at least.

A year? 

Able was I ERE

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Re: Pay off Mortgage with Home Equity Loan
« Reply #12 on: January 26, 2013, 04:20:46 AM »
Yeah that was my one concern.  If I prepay the home equity loan it doesn't seem to behave the same as prepaying a mortgage.  I wonder if at two years I request the loan payoff document and I'd have to pay the full amount of the interest over 5 years.
No.  It's a simple interest loan.  You only pay on outstanding balance. 

Have a pen fed hel and have paid over a year in advance.  Happy to share  the payment schedule if that helps.

More info and links (now that I'm on a screen larger than 4 inches).  Here's a discussion on Fatwallet discussing the PenFed HEL ( http://www.fatwallet.com/forums/finance/1179515/ ), and a related thread discussing payment strategies for a simple interest loan ( http://www.fatwallet.com/forums/finance/85247/ or direct link to an analysis http://www.dhanson.net/nbls.htm ).

Short answer: the interest calculations is the best of both worlds for you: Unlike a mortgage, making a payment a few days early affects the amount of interest you pay because your daily balance was lower.  Unlike a HELOC, you only pay interest on the outstanding principal, not the compound interest.