If a bank financed the purchase of your home, you're probably making monthly payments to the bank. Unfortunately, you may have bought it when interest rates were high. While you can refinance your home and establish a new mortgage with a lower interest rate, you may have to pay substantial closing costs. Depending on the amount of money you still owe on your mortgage, you may be able to pay it off with a Home Equity Line of Credit (HELOC) and save money.
Step 1
Find the fair market value of your home by contacting a local real estate broker and asking for a free market analysis. This will give you a general idea of what your home is worth in today's housing market.
Step 2
Call the bank and get your mortgage payoff amount. This is the amount you would pay today if you had the cash to pay off your mortgage. It does not include the interest added to your monthly payment.
Step 3
Subtract your mortgage payoff from your home's fair market value. For example, if you owe the bank $50,000 on your home and the real estate agent told you that your home is worth $150,000, you would subtract $50,000 from $150,000, leaving you with equity in your home of $100,000.
Step 4
Calculate 80 percent of your equity. In this example, that would be $80,000 and that is about how much a bank will lend you on a home equity line of credit.
Step 5
Request a HELOC from the same bank that holds your first mortgage. In addition to needing equity, you'll need a good credit rating. And the bank will look at how much debt you have and compare it to your income.
Step 6
Pay off your mortgage with your new HELOC if the current interest on your mortgage is higher than the interest rate for the HELOC. You will reduce the amount of interest you are paying and you can still deduct the interest on your federal income taxes.
Tips and Warnings
- The best scenario for using a HELOC to pay down a mortgage is when you owe less on your mortgage than the amount of your home equity line of credit. Otherwise, you will have two monthly payments. Ask your bank for an early conversion once you pay off your mortgage. A HELOC has an adjustable interest rate, and your bank will use the current interest rate to convert your HELOC to a conventional loan. The sooner you do this the sooner you lock in the new lower rate.
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