Using a HELOC to Pay Off Your Mortgage in 2024

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Reviewed byTimothy Manni
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Reviewed byTimothy Manni
Edited byJonathan Ramos
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Updated: May 6, 2024

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When exploring repayment strategies, many homeowners find that a home equity line of credit (HELOC) can be a solid option for mortgage management. You can use one to pay off your balance, especially if you have considerable equity in your home. HELOCs can also bring benefits like flexible withdrawals, allowing you to get whatever amount you need, when you need it.

However, a HELOC uses your home as collateral, which poses a risk should you default on it. We'll discuss the advantages and challenges of utilizing a HELOC to pay off your mortgage, giving you the insights to approach this decision with confidence.

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Can You Pay Off Your Mortgage Using Your HELOC?

Yes, you can pay off your mortgage using a home equity line of credit (HELOC), but it’s a strategy best employed only in specific situations. Let’s explore two scenarios to see when this approach brings the most benefits.

JORDAN’S EQUITY TRIUMPH

Meet Jordan, a graphic designer who's seen her home's value soar due to a booming housing market. Five years ago, she bought her home for $300,000. Thanks to the area becoming highly sought after, its current market value is $450,000. Jordan still owes $100,000 on her mortgage, but the significant increase in home equity presents a unique opportunity.

Jordan's lender offers a HELOC with a cap of 85% of the home's value minus any outstanding mortgage balance. That gives Jordan $282,500 through a HELOC.

Despite HELOC rates typically being higher than mortgage rates, Jordan’s move to use a HELOC to pay off her mortgage was strategic. She leveraged the substantial equity growth in her home, allowing her to borrow enough to clear her balance and ensure a $182,500 credit reserve for future needs. More than that, Jordan achieved all this while avoiding dipping into her personal savings.

ALEX’S FINANCIAL CROSSROADS

Alex, a freelance photographer, has income that fluctuates throughout the year. Two years ago, he purchased a home for $250,000. With a down payment of $50,000, Alex took out a mortgage of $200,000, of which $190,000 remains to be paid. Since then, the housing market has remained stable, and its value has only increased to $260,000. Alex's lender offers a HELOC up to 80% of the home's equity. That allows Alex to borrow up to $18,000.

Since Alex hasn't built up much equity, the available amount is significantly less than what he needs to pay off the mortgage. Moreover, the interest rates on HELOCs, in Alex's case, are variable and currently higher than his fixed mortgage rate. Given these conditions, plus Alex's fluctuating income, relying on a HELOC to pay off the mortgage introduces unpredictability and may not provide the desired financial relief or savings.

When to Use Your HELOC for Mortgage Pay Off

Deciding to use a HELOC to pay off your mortgage is a strategic choice that hinges on your financial situation. Assess whether your circumstances align more closely with success stories like Jordan's or cautionary tales like Alex's. This pause can help you make an informed decision on leveraging a HELOC for a mortgage payoff. Here are some scenarios when it makes sense to consider a HELOC to pay off your mortgage:

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Determining whether a HELOC is your pathway to mortgage freedom requires careful consideration of your unique financial landscape.

MONEYGEEK EXPERT TIP

Just because you qualify for a HELOC doesn't mean you should use one to pay off your mortgage balance. There are a lot of things to consider before this strategy becomes viable. For example, is your mortgage nearly paid off, and is your home in need of repairs? Would having a financial cushion also come in handy for unexpected costs over the next few years?

If that sounds like you, make sure you have a plan for any remaining HELOC funds after paying off your mortgage, and consider how to manage loan repayment amidst fluctuating interest rates. — Timothy Manni, Mortgage and Real Estate Consultant

Advantages of HELOCs for Mortgage Payoff

After assessing your situation and concluding that a HELOC aligns with your strategy for mortgage payoff, the next step is to explore the specific advantages this financing option offers. A HELOC lets you access your home's equity and introduces flexible financial solutions. Let's explore some benefits and how they can optimize your mortgage repayment plan.

Potential for Lower Monthly Payments

Using a HELOC to pay off your mortgage can lead to lower monthly payments, especially during the draw period when lenders often allow you to make interest-only payments. It can significantly reduce your monthly financial burden, providing flexibility in your budget. However, approach this benefit with caution.

While interest-only payments can ease your short-term load, they don't reduce the principal balance of your loan. Once your repayment period begins, you may experience payment shock as the amount may increase considerably.

Flexibility

Unlike traditional loans that disburse a lump sum, a HELOC allows you to borrow precisely what you need, when you need it. If you choose not to allocate all the approved funds toward your mortgage, you can use the remainder for other financial priorities.

For example, investing in home renovations or improvements not only addresses immediate needs but could also lead to possible tax benefits and enhance the value of your property. This adaptability extends to being able to draw varying amounts at different times, ensuring you can adapt your borrowing to suit evolving needs.

Lower or No Closing Costs

While HELOC closing costs can vary, falling between 2% and 5% of the borrowed amount, many lenders now provide options with minimal to no closing costs. It makes HELOCs an attractive alternative, especially compared to the expenses associated with mortgage refinancing. The possibility of saving on upfront costs, including waived application fees and closing costs, makes HELOCs a cost-efficient option to manage mortgage debt.

Risks of Paying Off Your Mortgage With a HELOC

Opting for a HELOC to pay off your mortgage introduces certain risks worth considering. Your home becomes collateral, risking foreclosure if repayments falter. HELOCs typically feature variable interest rates, potentially leading to rising payments over time. Considering these risks can lead to a more informed choice on whether this strategy aligns with your financial goals and circumstances.

Rates

HELOC rates are often higher than traditional mortgages, diminishing the potential for interest cost reduction. Furthermore, HELOCs usually come with variable rates, so the interest you pay can fluctuate over time based on market conditions. This variability introduces unpredictability, as rising rates can increase your monthly payments and overall loan cost, impacting your budget and long-term financial planning.

Homeownership Risk

Using your home as collateral for a HELOC carries the risk of foreclosure if you're unable to meet repayment obligations. With the potential for fluctuating payments due to variable interest rates, ensuring financial stability before opting for this strategy is highly recommended. The link between your HELOC and your home's security is fundamental to protecting your homeownership.

Debt Cycle

Opting for a HELOC to pay off your mortgage transitions your debt from one form to another rather than eliminating it. This approach can lead to the temptation to allocate funds toward non-essential expenses like vacations or luxury purchases, diverting you from your original goal of debt reduction. Additionally, it may result in higher interest costs over time, potentially outweighing the savings from paying off the mortgage.

Potential Penalties and Fees

Securing a HELOC introduces various costs beyond interest rates, such as annual fees and potential early payoff penalties. These can significantly increase the overall expense of the loan, making it more costly than anticipated. Awareness of these extra fees is crucial, as they directly impact the loan's affordability and could outweigh the benefits of using a HELOC to pay off your mortgage.

Pay Off Your Mortgage with a HELOC in 7 Steps

After carefully considering the advantages and disadvantages of using a HELOC to pay off your mortgage and assessing whether an early payoff aligns with your financial objectives, you may determine that a HELOC is indeed the most suitable choice for you. If that's the case, it's best to know the steps involved. We'll walk you through each one, ensuring you're well-prepared to navigate this strategy effectively.

1
Evaluate Your Home Equity

First, find out how much equity you have in your home. You need enough equity to cover your mortgage balance. Check your latest mortgage statement and compare it to your home's current estimated value.

2
Shop Around for HELOC Offers

Look for the best HELOC terms, including interest rates and fees. Don't just check with your current lender; compare offers from several to find the best deal.

3
Apply for a HELOC

Submit your application to the chosen lender, providing all necessary documentation. Ensure your documents are organized and accurate to speed up the approval process.

4
Wait for HELOC Approval and Closing

Getting a HELOC typically takes two to six weeks. Once approved, the HELOC will have a closing process, similar to your original mortgage closing. Use this waiting period to review the terms again and ensure you understand your obligations.

5
Draw Funds to Pay Off Your Mortgage

After closing, draw the required amount from your HELOC to pay off your mortgage. Coordinate this step carefully to avoid any overlap in payments.

6
Begin Repayment on Your HELOC

Start making payments on your HELOC according to your new repayment schedule. If possible, pay more than the minimum to reduce the principal faster and save on interest.

7
Monitor Interest Rates and Adjust Payments

Keep an eye on interest rates, as they can fluctuate. If rates drop, you might save money by refinancing your HELOC. Stay in touch with your lender to discuss options for locking in a lower rate if it becomes available.

Using a HELOC to pay off your mortgage involves careful planning and execution. Following these steps and being mindful of the interest rates and repayment terms can make this strategy work to your advantage. Regularly assessing your financial situation and adjusting your payments accordingly can lead to significant savings and a faster path to being mortgage-free.

Other Ways to Pay Off Your Mortgage

Even if using a HELOC doesn't align with your financial strategy for paying off your mortgage, there are still several effective methods to consider. Each alternative has benefits, helping you reduce your mortgage balance faster and save on interest costs over the life of your loan.

  • Refinancing: This involves replacing your existing mortgage with a new one, ideally at a lower interest rate. Refinancing has the power to lower your monthly payments and the total interest paid, making it easier to allocate extra funds toward the principal balance.

  • Home Equity Loan: Unlike a HELOC, a home equity loan provides a lump sum at a fixed interest rate. You can also use it to pay off your mortgage, and it offers a stable repayment schedule and potentially lower interest rates.

  • Extra Payments: Making additional payments directly toward the principal balance can significantly reduce the amount of interest you'll pay and shorten your loan term. Even occasional extra payments can make a big difference over time.

  • Bi-Weekly Payments: Paying half your monthly mortgage amount every other week results in one extra full payment each year. That can shave years off your mortgage term and save you a substantial amount in interest.

  • Mortgage Recast: This less common option involves paying a large sum toward the principal and then having the lender recalculate (or recast) your monthly payment based on the reduced balance, potentially lowering your payments without changing the term of your loan.

Adjusting your budget to free up funds for your mortgage can help accelerate your payoff timeline. For personalized advice that takes into account your unique financial situation and goals, consulting a financial advisor can be invaluable. They can help you navigate the options and determine how to pay off your mortgage faster in a way that aligns with your overall plan.

FAQ on Using a HELOC to Pay Off Your Mortgage

We've compiled a list of frequently asked questions that delve deeper into the specifics of using HELOCs for mortgage payoff. These can provide clarity and assist you in making more informed decisions regarding your mortgage and overall financial strategy.

Can I use home equity to pay off my mortgage?
How much can I borrow with a HELOC to pay off my mortgage?
Is using a HELOC to pay off my mortgage a better option than refinancing?
Can a HELOC also be used to pay off other loans after my mortgage?
How does paying off a mortgage with a HELOC affect my credit score?
What happens to my HELOC once my mortgage is fully paid off?
Can paying off a mortgage early with a HELOC save me money in the long run?
What is the shred method for HELOC, and how can it help in mortgage payoff?
What if my home's value decreases after using a HELOC to pay off my mortgage?
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