What are the risks of paying off a mortgage with a home equity loan?

You question is confusing... are you asking about paying off your primary residence first mortgage with your primary residence home equity loan? If so, is it a home equity loan or a home equity line of credit.. if it's a HEL, then that would make no sense, since once you pay off the first, the 2nd becomes the first.. And 2nd mortgage terms are usually worse than what is available for a first.. if you're talking about using a HELOC, then the same applies.. However with a HELOC, the rates are pretty low right now, and if your still in the withdrawal period, then the payment is deceiving, since you're not really paying anything towards principal until you get in the last 20 years of the loan.. I guess no matter what the situation, it really doesn't make any sense to pay off one loan by taking out another, unless the terms of that new loan are beneficial... but when it comes to homes, why not just refinance the first?? confusing question... I'm a Broker here in Scottsdale AZ and I only lend in Arizona. If you or someone you know is looking for financing options, feel free to contact me or pass along my information. 480-287-5714 WilliamAcres.com

That makes no sense at all...you are creating a mortgage to payoff another mortgage, why not just refinance?

If you are asking "What are the risks of paying off your existing mortgage with an Equity Line of Credit (HELOC)?", the biggest risk is that most mortgages are fixed rates and most HELOCS have an adjustable rate. Even if your mortgage is an adjustable, you have caps that will generally prevent the rate from rising more than 6% above the start rate. HELOCS usually have caps at 18%-21%. If rates rise in the future, and they will, you could get burned. More information is needed to determine if this is a wise choice for you. ~ Bert Carpenter, The LoansA2z team of NOVA Home Loans ~ NMLS 40586 ~ www.LoansA2z.com 888-889-9950

The risk is typically a home equity loan has an interest only period for 10 years at an adjustable rate, after the 10 years it would typically convert to a 20 year fixed. Terms and conditions of your individual loan may vary.

It depends.... can the money being used to pay off your mortgage with an equity line be placed elsewhere for a better return on your investment over the next 10 years?

The risks are mainly on two fronts- the first one is if you take out a large HELOC or home equity line of credit then it is going to negatively affect your credit in two ways- first the line will appear as a revolving trade-line so it will look like a maxed our credit card which will put a lot of stress on your credit scoring model. The second issue with credit is paying off a solid mortgage trade-line may also thump your credit a little bit. If you plan to do this make sure your line amount is at least under 50% of what your max credit limit is otherwise you are in for credit decline. The second issue is that all HELOCS are interest only and are a variable rate mortgage based upon a fixed rate portion known as your base rate and then your adjustable portion which should be based on the index of prime. Now prime is super low right now and most likely will be for the next 3-5 years based on the latest QE3 announcement -however that will change eventually so you need to look at the 30 year prime rate average online and also find out what your cap rate will be on the loan. The cap rate is the highest rate that you can adjust to during the term no matter what happens to the prime index. Then you need to plan on what your exit strategy will be after that and how long you plan to keep the line open. I am not sure what your financial goals are with using a HELOC to payoff your first mortgage but 10 year mortgage rates are in the high2's right now so if your goal is to pay down the mortgage then I would suggest looking at a simple refi.

Enter your answer here