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 Using a home equity loan to pay off a mortgage
  Getting a home equity loan before losing job
By the EchoBay Loans Expert
 Using a home equity loan to pay off a mortgage
Dear EchoBay Expert: I'm wondering if using a home equity credit line or home equity loan to pay off my current mortgage is a wise decision. I looked at refinancing my current loan but the closing costs seem too high in relation to the small amount I have left on my loan. I owe $19,000 on my mortgage and the interest rate is 7.70%. Thanks.

Dear Loyal Reader: For small amounts, such as yours, a home equity loan or home equity credit lines can be a sensible way to pay off your first mortgage. By paying off the debt with this type of loan, you will also still maintain the ability to deduct the interest.

If rates are much lower than your current loan, you could also stand to save thousands in interest. Home equity loans and home equity credit lines also generally have very low closing costs and you can find deals with no closing costs. Do be vigilant in your research of no closing costs loans though.

In all likelihood, the lender is making up for the fee in other ways. Since you owe so little, it is also likely you could pay off other debt by rolling it into the loan and taking advantage of the lower interest rate and larger tax deduction. If you owe a large amount on a mortgage, refinancing into a home equity line of credit may not be best for you.

Rates on HELOCs are generally variable and will fluctuate over time. While you may have several years of low rates and therefore a nice amount of savings in interest, you will likely experience times when rates soar and along with it your payments and the amount of interest paid.

For long-term loans, a variable rate is a risky endeavor to undertake. When you are faced with the possibility of losing your home if you cannot make the payments, a fixed rate and a fixed payment plan is the way to go for long-term debt.

 Getting a home equity loan before losing job
Dear EchoBay Expert: Half of my co-workers in the office I work in have recently been laid off and the rumor is my position is the next to go. I only have about three months of living expenses saved in the bank and I need to know if I should get a home equity loan or home equity line of credit to pay my expenses if I can't find a job soon.

Dear Loyal Reader: First and foremost, get a home equity line of credit instead of a home equity loan, and do it now while you can still show the lender that you have an income. A home equity loan would give you the full amount you're borrowing upfront in one lump sum and you will be required to pay that money back in equal, monthly installments.

That's something that may be hard to do if you find yourself without a job in the months ahead and if you don't make your payments, you'll lose your home. A home equity line of credit will allow you to borrow the money only when you need it, providing you with the flexibility you're going to need if you do indeed get laid off.

The interest rates will be much lower than if you were to finance your unemployment period with a credit card and that interest may be deductible. However, remember that just because you have the credit available doesn't mean you should use it.

Only use the money if you absolutely have to and make sure that you pay it back as quickly as possible. Your home will be on the line, so keeping current with this debt will need to be a priority.

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