Using A HELOC To Pay Off Your Mortgage (2024)

Using a home equity line of credit (HELOC) is an unconventional approach to paying off your mortgage early. While tapping your home equity to reduce your home loan balance has several potential benefits, it’s not an ideal option for every homeowner.

Is It Possible To Pay Off Your Mortgage With a HELOC?

Yes, as long as you have sufficient equity. Most HELOC lenders require you to have at least 20% equity to qualify for a HELOC. Depending on your remaining principal, you could use the HELOC to make a big dent in the mortgage or pay it off entirely.

Why You Might Consider Using a HELOC To Pay Off Your Mortgage

One of the biggest advantages in using a HELOC to pay off your mortgage is to reduce your interest rate. In turn, you can lower your monthly payment and potentially save thousands of dollars.

It’s important to note that HELOC rates tend to be higher than mortgage rates. As a result, this strategy can be difficult to execute. Many HELOCs also have a variable rate, so you may end up paying a higher interest rate at some point during the term.

An interest-only HELOC can give you the lowest monthly payment—at least initially. During the draw period, which is often the first 10 years of the HELOC term, your sole responsibility is to pay the monthly interest charges on the money you borrow. Depending on current HELOC rates and the amount you borrow, these payments can be much lower than your mortgage payments.

Lenders require you to start making principal payments on a HELOC once the draw period ends and the repayment period begins. Most repayment periods last up to 20 years.

Using a HELOC to pay off your mortgage can also be cheaper than refinancing as you’ll typically incur lower closing costs. Some lenders even waive closing costs on HELOCs.

How To Use Your HELOC To Pay Off Your Mortgage

Follow these steps to tap your home equity and reduce—or eliminate—your mortgage balance:

1. Compare lenders. Evaluating HELOCs from multiple lenders can help you secure the best interest rate for your desired loan amount. Try to find a lender that doesn’t charge as many upfront fees or will waive certain closing costs.
2. Apply for a HELOC. The HELOC application process can be less rigorous and more affordable than a mortgage refinance. Your HELOC loan limit is dependent on how much equity you have.
3. Get a home appraisal. A home appraisal is an essential step to calculating your home equity. Depending on the lender and your desired loan amount, you might qualify for a virtual home appraisal which can minimize underwriting costs.
4. Close on the loan. You’ll sign closing documents disclosing your interest rate, fees and the duration of your draw period and repayment period. In most situations, your funds are accessible starting on the fourth business day after closing.
5. Pay off your mortgage. Withdraw the amount needed to pay off your mortgage balance from your credit line and send the payment to your mortgage servicer.
6. Make HELOC interest payments. Many HELOCs only require interest payments during the draw period, although you may want to repay the principal during this time to reduce your total interest.
7. Repay the HELOC principal. Mandatory principal and interest payments start during the repayment period, after the draw period closes. The HELOC repayment period usually ranges between 10 and 20 years.

Anticipate having a variable interest rate for the life of the HELOC, although some lenders offer fixed-rate HELOCs. These tend to have higher starting interest rates than variable-rate HELOCs, but you’ll avoid any future interest rate hikes.

If interest rates go down in the future, there are ways you can refinance a HELOC to reduce the total borrowing costs or improve your repayment terms.

Pros of Using a HELOC To Pay Off Your Mortgage

• Lower monthly payments. Your lender may only require interest payments during the initial draw phase which frees up funds for other expenses and goals. That said, there usually isn’t a prepayment penalty if you want to repay the HELOC principal ahead of schedule.
• Fewer closing costs. HELOCs tend to charge fewer closing costs than a mortgage refinance, saving you money up front. Lenders may also waive application fees and closing costs entirely.
• Withdrawal flexibility. You can use your home equity for other purposes including high-interest debt consolidation and tax-deductible home improvements.

Cons of Using a HELOC To Pay Off Your Mortgage

• Variable interest rates. Most HELOCs have a variable interest rate that can adjust frequently. If rates go up, expect an increase in your monthly payment and total borrowing costs. There’s also no guarantee that you’ll find a HELOC rate lower than your existing mortgage rate.
• Need sufficient equity. Many lenders require homeowners to have between 15% and 20% equity to qualify for a HELOC.
• Your home is collateral. Same as with a primary mortgage, your house serves as collateral and lenders can foreclose on the property if you default on your HELOC payments.

Alternatives to HELOCs To Pay Off Your Mortgage

A HELOC isn’t always the best option for paying off your mortgage. These methods may yield better financial results:

• Extra mortgage payments. Staying put and making additional mortgage payments may be the easiest course. For example, you can make the equivalent of a 15-year mortgage payment or biweekly mortgage payments. Every extra contribution reduces your principal and lifetime interest costs, and you don’t have to apply for a new loan.
• Home equity loan. A home equity loan taps your available equity, providing you with a lump sum distribution that you can apply toward your mortgage balance. You’ll have a fixed interest rate and monthly payment for the life of the loan, which makes it easier to budget your total borrowing costs and potential interest savings.
• Mortgage recast. Mortgage recasting involves making a lump-sum payment toward your principal balance. It doesn’t change your interest rate or reduce your loan term. You’ll pay a small recasting fee—typically a few hundred dollars—and get a smaller monthly payment for the remainder of your term.
• Mortgage refinance. Refinancing a mortgage is the more traditional way of obtaining a lower rate and may be more cost effective than a HELOC. When you refinance, you’ll pay off your existing mortgage and replace it with a new rate and term. This can help you pay off the mortgage faster—assuming you refinance into a shorter term—and substantially reduce your interest costs.