4 Lesser-Known Mortgage Moves You Should Know

Another option is to take out a home equity loan and use it to pay off your current mortgage. Unlike refinancing, which replaces your existing mortgage with a new one, a home equity loan9 is a second loan that lets you borrow against the equity you’ve built up in your home. This might be a smart move if you have a relatively small balance remaining and plan to pay off your mortgage in the next 10 years.

Here’s how it works:

1. Your lender determines your home’s value and subtracts what you still owe on the mortgage. This is how much equity you have in your home before you take out a home equity loan. Banks will typically require you to have at least 15% to 20% equity in your home after you borrow through a home equity loan.5 This is why you need to have significantly equity in your home to make this plan work. (At some point, you will have both your regular mortgage and your home equity loan as debt against the house.)
   
   
2. You apply for a fixed-rate home equity loan with a term of five to 10 years.
   
   
3. Once approved, use the funds to pay off your mortgage balance.

Keep in mind that the interest rate on a home equity loan may be slightly higher than a new mortgage. Still, it might be worth it if the rate available on a home equity loan is lower than your existing rate.

Use a Home Equity Line of Credit to Make a Cash Offer on a New Home

Cash is king in a competitive housing market. A cash offer is more attractive to sellers, so it could be the deciding factor in a bidding war.6 If your money is tied up in your current home, how do you compete?

Consider a home equity line of credit (HELOC), which is a revolving line of credit similar to a credit card but with a lower interest rate.

If you’ve built up significant equity in your current home, a HELOC allows you to borrow against your home without selling it first. Once approved, you can tap into the credit line to make a competitive cash offer on your next home. After selling your current home, you use the proceeds to pay off the HELOC.

You’ll need to plan ahead, as it usually takes two to six weeks to get a HELOC approved.7 Once your HELOC is approved, you can take out the funds at any time. (Unlike a home equity loan, you don't have to take the money as soon as you're approved. Instead, you can take the money out when you need it — and only start accruing interest once the funds are dispersed to you.)

Also, you may be paying for two mortgages and the HELOC until your old home sells, so this strategy only works if you have cash available to cover the payments. Since you're only borrowing temporarily, you’ll simplify your situation by paying off the HELOC and your old mortgage when your home sells.

Secure a Bridge Loan to Buy Before You Sell

Another option for raising the funds to purchase a new home while waiting for the existing one to sell is a bridge loan. These loans allow you to make an offer that isn’t contingent on the sale of your current house — a big plus for sellers.

Bridge loans go by different names depending on the lender. Some banks refer to them as “swing loans,” “interim financing,” or “home purchase bridge solutions.” Regardless of the name, the structure is typically the same: you borrow a portion of your home equity, usually with a loan term of just six to 18 months.8 Once your current home sells, you pay off the loan with the proceeds.

Bridge loans typically have higher interest rates than traditional mortgages, and you must juggle multiple loan payments until the property is sold. For these reasons, they’re best suited for homeowners with strong credit, stable income, and significant home equity.

Make Your Mortgage Work for You

While refinancing a mortgage gets most of the attention, these strategic (and potentially lower cost) options can give you flexibility, reduce your payments, or help you compete in a tight housing market. Before making any move, consult a financial advisor to explore your options based on your goals, financial position, and market conditions.