Using a HELOC To Pay Off Your Mortgage

Unlocking equity with a HELOC may not be best for mortgage payoff

Young couple looking through documents at home
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A HELOC taps into the equity in your home to provide money for various uses. These can include making home improvements, paying off high-interest credit card bills, and even settling medical bills. 

However, using a HELOC to pay off a mortgage is usually not a good idea—and we’ll explain why

What Is a HELOC or Home Equity Line of Credit?

A HELOC, the nickname for a home equity line of credit, is a second mortgage in the form of a line of credit. Equity is the amount your property is currently worth, minus the mortgage balance amount. Unlike a home equity loan, HELOCs usually have adjustable interest rates. HELOCs  use your home as collateral for the loan. This may put your home at risk if your payment is late or you can't make your payment at all. 

“You can get approved for a HELOC—say it's for $100,000—and the bank will allow you to borrow as little or as much of that as you want,” Melissa Cohn, executive mortgage banker at William Raveis Mortgage, said to The Balance by email.  “You are only required to make interest-only payments on a HELOC for what is called the ‘draw’ period, which is usually the first 10 years.” 

 And if you repay the principal amount that is borrowed, she said you’ll be able to borrow and then pay it back again as often you want to, during the draw period.  “At the end of the draw period, the loan gets repaid over the remaining 20-year term.”

 This makes a HELOC a popular choice for home improvement projects, and paying down high-interest bills, in addition to other uses. But should you get one to pay off your mortgage?

What To Consider When Refinancing With a HELOC

If you’re considering refinancing with a HELOC, Cohn doesn’t recommend doing so. 

“HELOCs are ideal for short-term borrowing needs—if you can pay it back quickly and not add to long-term borrowing,” Melissa Cohn, executive mortgage banker at William Raveis Mortgage said. But a mortgage is typically a long-term endeavor, often stretching over 30 years.

To get a HELOC for any reason, you first would need to determine how much equity you have in your home and how much is still owed on the mortgage, in addition to your current monthly payments and how they would be affected by the HELOC.

The Pros and Cons of Using a HELOC To Pay Off Your Mortgage

Pros
  • A HELOC with a lower interest rate may be advantageous, if you’re close to paying off a mortgage

  • You may be able to get an introductory, discounted rate

  • You may be able to get a fixed-rate option


Cons
  • HELOC interest rates tend to be higher than mortgage rates

  • HELOC interest rates can change—and may go higher because they’re usually adjustable

  • Much riskier than just making extra principal payments

  • You’ll have to pay numerous fees


Pros of Refinancing With a HELOC Explained

If you only have a few years left on a higher-interest-rate mortgage, a HELOC may (emphasis on the may) be advantageous because you’ll be paying less interest.  

 Also, you may be able to get an introductory rate at a further discount (similar to credit cards that are offered at enticing introductory rates).

 While HELOCs tend to have variable rates, you may be able to convert it to a fixed rate.

Cons of Refinancing With a HELOC Explained

“HELOC rates are generally higher than mortgage rates,” Cohn said. If the HELOC rate is higher than, or even equal to your current rate, it’s probably not a good idea to refinance your mortgage.

 “Also, the rate of the HELOC is set as a percentage over the prime rate, and it can adjust monthly, that’s why HELOCs are best when you can pay the loan back quickly—they are not good long-term,” Cohn said.

There are also numerous fees involved in a HELOC, including a property appraisal fee, application fee, possibly a membership, early-cancellation or inactivity fee, up-front charges like points, and then closing costs.

Frequently Asked Questions (FAQs)

Is a HELOC a good idea?

“For a home repair—for short-term borrowing—a HELOC is a great idea,” Cohn said. “You can get a HELOC with very little closing costs, and they are interest-only, so the payment is lower.”

 While a HELOC can be a good idea to finance home improvement projects or pay off credit cards, or medical bills with lower-interest-rate funds, HELOC rates are still usually higher than those of a regular mortgage because they can rise over time. That makes it a bad option to pay down a mortgage.

How is a HELOC different from a home equity loan?

A HELOC is a home equity loan that is a line of credit with an adjustable rate. However, a home equity loan has a fixed rate and fixed payments, and because it’s not revolving, you wouldn’t keep borrowing and repaying the loan. 

How do you pay back a HELOC?

“The minimum payment for the first 10 years is interest-only, and no principal is required until the 10 years are over,” Cohn said. “Then, the payments are made on a traditional amortizing basis.