A home equity loan can be a good way to access some of the equity you’ve built up in your home, particularly to finance home improvements. With a home equity loan, you receive a lump sum, and pay back the loan over a set period at a set interest rate. This interest rate is generally quite low, because just as in a mortgage you put your house up as collateral.
In some cases, you might want to get out of a home equity loan early. If you’ve just taken out the loan, you have a short period (three business days) to back out, no questions asked. After that, you’ll generally have to pay the loan back in order to get rid of it, and there are several ways you can raise the money to do that. In this article, we’ll look at your options.
- When you take out a home equity loan, you have three business days during which it can be canceled without consequence. If you choose to exercise this right, your lender must return any fees or payments.
- After this period, you’ll have to pay back the loan in order to get rid of it. If you have the cash on hand, you can pay your lender directly.
- If you sell the house, you can use the sale proceeds to repay the home equity loan.
- Alternatively, you can re-finance the loan using a new one.
- Just be aware that some home equity loans have early repayment penalties, so check with your lender before you make a final decision.
Canceling a Home Equity Loan
At the broadest level, there are two main ways in which you can get out of a home equity loan: cancel it, or pay it back,
The right to cancel the refinancing of a mortgage is technically known as the right of rescission, and only applies during the 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, giving borrowers a cooling-off period and the time to change their minds. Not all mortgage transactions have the right of rescission. The right of rescission exists only on home equity loans, home equity lines of credit (HELOCs), and refinances of existing mortgages in which the refinancing is done with a lender other than the current mortgagee. It doesn’t apply to vacation or second homes.
If you’ve missed this three-day window, either by a couple of days or a decade, you have just one option when it comes to getting rid of your home equity loan – pay it back.
You have the right to cancel a home equity loan within three days of signing up for a home equity loan. If you cancel the loan within this period, your home is no longer collateral and can’t be used to pay the lender. Your lender must also refund you all of the fees they’ve charged: That 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 Back or Refinancing a Home Equity Loan
Once your home equity loan is active, the only way to get out of it is to pay it back. If you’ve just received the money from your loan, or are lucky enough to have a lot of cash on hand, you can do this directly. Just make sure that you understand the penalties that might apply if you do so: some lenders will charge you for early repayment of the loan.
If your loan has been running for a while and you don’t have enough cash on hand to repay it, there are several common ways of raising the funds needed to pay off the balance and get out of the loan:
- You can sell your home, even if you have an active home equity loan taken out against it. As long as your house has increased in value since you took out the loan, this is a fairly straightforward way to get out of the loan, because you can use the money you receive from the sale to pay off the home equity loan (alongside your primary mortgage).
- You can re-finance your home equity loan. If it’s been a few years since you took out your home equity loan, and your house has increased in value or interest rates have decreased, it might make sense to take out another loan. It’s possible to take out another home equity loan to repay the first, or to repay a home equity line of credit (HELOC). It’s even possible to roll a home equity loan into your primary mortgage.
While this last option will allow you to pay off your home equity loan, you are essentially converting it into another form of debt. That means that you will still have to make monthly payments, even if these are lower than they were for 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 agreeing to it. Your lender must return any fees they have charged, and refund you for any payments you’ve made. They have 20 days in which to do so.
Can I Sell a House With a Home Equity Loan?
Yes. You can sell a house even if there is an active home equity loan taken out against it. In this case, you can use the money from the house sale to repay the loan. If your home has decreased in value since you took out the loan, however, you may not receive enough money to repay it. In this case, some lenders will write off the remaining balance; in other cases you’ll have to find the funds elsewhere.
Can I Re-finance a Home Equity Loan?
Yes. You can use a new loan to pay off an existing home equity loan. If your house has increased significantly in value since you took out the original loan, or interest rates have gone down, this could make financial sense.
The Bottom Line
When you take out a home equity loan, you have three business days during which it can be canceled without consequence. If you choose to exercise this right, your lender must return any fees or payments.
After this period, you’ll have to pay back the loan in order to get rid of it. If you have the cash on hand, you can pay your lender directly. If you sell the house, you can use the sale proceeds to repay the home equity loan. Alternatively, you can re-finance the loan using a new one. Just be aware that some home equity loans have early repayment penalties, so check with your lender before you make a final decision.