Author Topic: Home Equity Loan to pay down mortgage quicker?  (Read 2859 times)

GumbyPickles

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Home Equity Loan to pay down mortgage quicker?
« on: January 27, 2016, 08:02:08 AM »
Trying to see if I'm being stupid and missing something.

Currently have mortgage at 4.25%, home equity loan from PenFed offers 3.70% no closing costs.

Does it make sense to take out a $40k loan (for example) from penfed and use the money to pay off the mortgage, while keeping the 5-year minimum payments on the Home Equity loan?

MDM

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Re: Home Equity Loan to pay down mortgage quicker?
« Reply #1 on: January 27, 2016, 10:08:56 AM »
If you can handle the extra monthly payment, you will pay less in interest for the "mortgage + HELOC" compared with the "mortgage only".

Up to you to decide if that is the best alternative use for the extra monthly payment amount.

boarder42

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Re: Home Equity Loan to pay down mortgage quicker?
« Reply #2 on: January 27, 2016, 10:14:04 AM »
well i'm sure that rate is variable.  and even if it isnt the bank can call on that loan at any time usually.  and if all your money is tied up in your house what are you going to do?

invest money in the market.  there is no reason to create this added risk ... your rate is so low you shouldnt care how fast you pay your house off.

gardeningandgreen

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Re: Home Equity Loan to pay down mortgage quicker?
« Reply #3 on: January 27, 2016, 11:25:43 AM »
Is it a home equity loan or a home equity line that makes a difference. A HELOC has a variable rate a home equity loan generally doesn't. If it is a home equity loan I would go for it. You are refinancing your current mortgage essentially. The bank is eating the closing costs so its a win.

GumbyPickles

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Re: Home Equity Loan to pay down mortgage quicker?
« Reply #4 on: January 28, 2016, 06:21:04 AM »
Is it a home equity loan or a home equity line that makes a difference. A HELOC has a variable rate a home equity loan generally doesn't. If it is a home equity loan I would go for it. You are refinancing your current mortgage essentially. The bank is eating the closing costs so its a win.

Yes, it's a fixed rate 5-year equity loan.  Thanks for your input all; the only downside is the increased money due monthly, which makes sense, so I think it's worthwhile

boarder42

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Re: Home Equity Loan to pay down mortgage quicker?
« Reply #5 on: January 28, 2016, 07:18:51 AM »
you would have to quantify what that increased money due monthly would be making in standard market conditions to really see if its worth while.  hard to predict a 5 year market though.

frugaliknowit

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Re: Home Equity Loan to pay down mortgage quicker?
« Reply #6 on: January 28, 2016, 07:50:12 AM »
What is your 1st mortgage balance?

neo von retorch

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Re: Home Equity Loan to pay down mortgage quicker?
« Reply #7 on: January 28, 2016, 07:55:20 AM »
Yes - I wouldn't take into consideration investments on a 5 year horizon. It's unpredictable, while the interest savings are guaranteed. (Still, if you would be putting the money in the market and leaving it for 15+ years, "time in market" is be best indicator of how well you'll do.)

tweezers

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Re: Home Equity Loan to pay down mortgage quicker?
« Reply #8 on: January 28, 2016, 12:06:03 PM »
Is it a home equity loan or a home equity line that makes a difference. A HELOC has a variable rate a home equity loan generally doesn't. If it is a home equity loan I would go for it. You are refinancing your current mortgage essentially. The bank is eating the closing costs so its a win.

Yes, it's a fixed rate 5-year equity loan.  Thanks for your input all; the only downside is the increased money due monthly, which makes sense, so I think it's worthwhile

Could you recast the loan and reduce your mortgage payments?  The fee to do this is typically in the $400-600 range.

http://www.bankrate.com/finance/mortgages/what-is-mortgage-recasting-and-why-do-it-1.aspx

Dicey

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Re: Home Equity Loan to pay down mortgage quicker?
« Reply #9 on: January 28, 2016, 01:39:51 PM »
Could you recast the loan and reduce your mortgage payments?  The fee to do this is typically in the $400-600 range.

http://www.bankrate.com/finance/mortgages/what-is-mortgage-recasting-and-why-do-it-1.aspx
Winner, winner, chicken dinner! This is the best advice I've seen so far, closely followed by:

[T]here is no reason to create this added risk ... your rate is so low you shouldn[']t care how fast you pay your house off.

I'll wrap with this caveat: Pre-FIRE, I was all hyped up about PenFed after reading about them here. I was considering doing something similar. When I scrutinized their programs on their site, too many times there was a hidden "gotcha" in the fine print. Do not do this without reading and digesting every.single.word of the fine print and then running every worse-case scenario you can think of. After that, think long and hard about other, safer ways to reach the same goal.