Using Home Equity To Pay Off Second Loan

Added February 25, 2005 by Ilyce R. Glink

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Summary: A homeowner wants to use the equity they have on a house to pay off a trailer home on the same investment property. Using a home equity loan to pay off one of their loans could save them a lot of money. Using a home equity loan could also shorten the life of the loan.

Q: I have a question about some investment property that my mom and I own. We have a house and a trailer home on some land.

The house just got paid off but it seems like we're not building up any equity on the trailer. We borrowed $30,000 on the trailer and are paying 9.5 percent interest.

Would it be wise to borrow the money on the house and pay off the trailer? What would be the best plan of action?

A: If you can take out a mortgage or home equity loan against your home to pay off the trailer, you'll probably save a load of cash. If you have good credit, you ought to be able to take a home equity loan for somewhere less than 6 percent. That's a third less than what you're paying. You may even get a fixed rate home equity loan for substantially less than you are paying on your current loan on the trailer.

Let's look at how the numbers work. Right now, if you took out a 30-year mortgage on your trailer at 9.5 percent interest, your monthly payment is $252.

If you take out a home equity loan for 6 percent for $30,000, and you wanted to keep the same payment, you'd pay off the loan in 15 years, or half of what it would take you at the 9.5 percent rate.

If you wanted to shorten the term of your loan, you could opt to pre-pay the mortgage. You could pay off the loan in 10 years (if you pay $333 per month) or 5 years (if you pay $580 per month).

Please talk to your local banker about what kind of home equity loans they offer. Many banks don't even charge points or fees for a home equity loan, and they offer a fixed rate of interest.

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