Is using a home equity loan to pay off mortgage a good idea?

ByABC News
March 17, 2012, 6:55 AM

— -- Money Watch, a personal finance column that runs every Saturday, features a financial planner from the National Association of Personal Financial Advisorsanswering reader questions about saving, protecting and growing your money. To submit a question, e-mail USA TODAY personal finance reporter Christine Dugas at: cdugas@usatoday.com.

Q: My bank suggests that I take out a home equity loan for about 2% and pay off my mortgage, which has a rate of 5.6%. It sounds too good to be true. What are the pros and cons?

A: You will save an enormous amount of interest over the life of the loan. And the interest is still deductible on your taxes if you itemize your deductions.

But before you can make a good decision, you need more information. Be sure to ask the following questions:

• Are there any closing or processing costs for setting up the home equity loan? If so, how much will it total?

• What if you pay the loan off quickly, are there any penalties for the loan not being open for a certain amount of time?

• Is it a fixed-rate home equity loan or a variable-rate home equity line of credit? If it has a variable rate, there is a danger that the rate could go up above 5.6%. Find out if there is a cap on how high the rate could go.

• Is there a set ceiling on the amount of the loan? As you pay down the balance, is more credit available? If so, be careful about continuing to borrow because you can have spiraling debt.

Be aware that if the value of your home has dropped, it will reduce the amount you can borrow with the home equity loan.

We advise our clients to obtain comparisons on rates, fees and other costs from three different institutions. Sometimes your local credit union may have the best deal.

Brian R Carlton, NAPFA-Registered Financial Adviser

Huff, Stuart & Carlton, Forest, Va.

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