So, you’ve got a home equity loan that you’d like to pay off? When you originally got your home equity loan, it provided you with a lump sum of cash that you needed to start a business, complete a home renovation or consolidate debt. However now, it is an extra payment that you have to make each month – and since you find yourself in a better financial situation, you’d like to take care of that debt and pay it off.
But before you do, you need to check your agreement with the home equity loan lender. Because sometimes paying off your home equity loan early may not be worth it.
How do home equity loan payments work?
Home equity loans which are also referred to as second mortgages, work much the same way that first mortgages do. A specific mortgage term is set, and you make fixed payments throughout the term. As with the case of first mortgages, you may be able to put a certain amount of extra money on your home equity loan each year.
If you wish to pay off the entire loan within the first few years of the term, you could end up having to pay a prepayment penalty. The farther you are from the end of your term, the higher this penalty is likely to be. So instead of trying to saving yourself money on interest payments by paying off your home equity loan too early, you could actually end up costing yourself more money than you would have saved.
How do I know if paying off my home equity loan early is worth it?
The first you will need to check your loan agreement to see what kind of penalty you would have to pay if you paid it off early. This amount should then be compared to how much interest you could save. Since the calculations can get a little complicated, it is usually best to consult with a mortgage broker on this.
Finally, if you do have a large lump sum of money that you can use to pay off your home equity loan early, it is a good idea to compare how much you would save by doing so to how much you could make if you invested the money or pay down your first mortgage with the lump sum payment instead.
In conclusion, while it technically is possible to pay off a home equity loan early, it might not always be the best decision.
If you would like help with a home equity loan – or any mortgage product – contact me today for a consultation.