How do I get rid of my home equity loan?
A home equity loan can be a good way to access some of the equity you’ve accumulated in your home, especially to finance home renovations. With a home equity loan, you receive a lump sum and repay the loan over a set period of time at a set interest rate. This interest rate is usually quite low because, as in the case of a mortgage, you put your house as collateral.
In some cases, you may want to get out of a home equity loan sooner. If you have just taken out the loan, you have a short period (three working days) to withdraw, no questions asked. After that, you’ll usually have to repay the loan to get rid of it, and there are several ways to raise money to do that. In this article, we’ll look at your options.
- When you take out a home loan, you have three business days during which it can be terminated without consequence. If you choose to exercise this right, your lender must reimburse any fees or payments.
- After this period, you will have to repay the loan in order to get rid of it. If you have cash on hand, you can pay your lender directly.
- If you sell the house, you can use the proceeds from the sale to pay off the mortgage.
- Alternatively, you can refinance the loan using a new loan.
- Just be aware that some home equity loans carry prepayment penalties, so check with your lender before making a final decision.
Cancellation of a home equity loan
At the most general level, there are two main ways to get out of a home equity loan: cancel it or pay it off,
The right to cancel a mortgage refinance is technically known as the right to rescind and only applies for three business days after you sign up for a home equity loan. This right was established by the Truth in Lending Act (TILA) and was created to protect consumers from unscrupulous lenders, by giving borrowers a cooling off period and time to change their minds. Not all mortgage transactions have the right of rescission. The right of rescission only exists on home equity loans, home equity lines of credit (HELOCs), and refinances of existing mortgages where the refinance is with a lender other than the current mortgagee. This does not apply to holidays or second homes.
If you missed that three-day window, either by a few days or ten years, you have only one option to get rid of your home equity loan: pay it off.
You have the right to cancel a home equity loan within three days of signing a home equity loan. If you cancel the loan within this time, your home is no longer secured and cannot be used to pay the lender. Your lender must also reimburse you for any fees they have charged: this includes application fees, appraisal fees or title search fees, whether paid to the lender or to another company that is part of the credit transaction.
Paying off or refinancing a home equity loan
Once your home equity loan is active, the only way out is to pay it off. If you have just received your loan money or are lucky enough to have a lot of cash on hand, you can do this directly. Just make sure you understand the penalties that might apply if you do: some lenders will charge you for prepaying the loan.
If your loan has been outstanding for a while and you don’t have enough cash to pay it off, there are several common ways to raise the funds needed to pay off the balance and exit the loan:
- You can sell your home even if you have an active home equity loan. As long as your home has gone up in value since you took out the loan, this is a fairly easy way to get out of the loan, as you can use the money you receive from the sale to pay off the loan. on home equity (in addition to your primary mortgage).
- You can refinance your home loan. If it’s been a few years since you took out your home equity loan and the value of your home has gone up or interest rates have fallen, it may be a good idea to take out another loan. It is possible to take out another home equity loan to pay off the first one or pay off a home equity line of credit (HELOC). It’s even possible to incorporate a home equity loan into your main mortgage.
While the latter option allows you to pay off your home equity loan, you are essentially converting it into another form of debt. This means that you will still have to make monthly payments, even if they are lower than your home equity loan.
Can I cancel a home equity loan?
Yes, but you have a short window to do so. The Truth in Lending Act (TILA) protects your right to cancel a home equity loan within three business days of making it. Your lender must refund any fees they have charged and refund you any payments you have made. They have 20 days to do so.
Can I sell a house with a home equity loan?
Yes. You can sell a home even if there is an active home equity loan against it. In this case, you can use the money from the sale of the house to pay off the loan. However, if your home has fallen in value since you took out the loan, you may not receive enough money to pay it back. In this case, some lenders will write off the remaining balance; in other cases, you will have to find the funds elsewhere.
Can I refinance a home equity loan?
Yes. You can use a new loan to pay off an existing home equity loan. If the value of your home has increased significantly since you took out the original loan or interest rates have dropped, this could make financial sense.
When you take out a home loan, you have three business days during which it can be terminated without consequence. If you choose to exercise this right, your lender must reimburse any fees or payments.
After this period, you will have to repay the loan in order to get rid of it. If you have cash on hand, you can pay your lender directly. If you sell the house, you can use the proceeds from the sale to pay off the mortgage. Alternatively, you can refinance the loan using a new loan. Just be aware that some home equity loans carry prepayment penalties, so check with your lender before making a final decision.