If you’re looking for a way to pay off your mortgage faster and save on interest, you may have heard about using a Home Equity Line of Credit (HELOC). But does the strategy of using a HELOC to pay off mortgage debt really work? The short answer is: Only if your HELOC rate is lower than your mortgage rate.
While HELOCs offer flexibility and access to your home’s equity, they also come with certain risks—especially because most have variable interest rates. Let’s take a closer look at when using a HELOC to pay off your mortgage makes sense and how to do it wisely.
What Is a HELOC and How Does It Work?
A Home Equity Line of Credit (HELOC) is a revolving line of credit that lets you borrow against the equity in your home. Unlike a traditional loan, a HELOC works more like a credit card—you can borrow, repay, and borrow again, up to your approved limit.
Here’s how it works:
- Your lender gives you access to a credit line based on your home’s equity.
- You can withdraw money as needed during the draw period (usually 5–10 years).
- During this time, you may only need to make interest payments.
- After the draw period, you enter the repayment period, where you must start paying back both principal and interest.
Since most HELOCs have variable interest rates, your payment could increase over time if rates go up. That’s why it’s crucial to compare your HELOC rate to your mortgage rate before using this strategy.
Can You Really Use a HELOC to Pay Off Your Mortgage?
Yes—but only if your HELOC has a lower interest rate than your mortgage.
The idea behind this strategy is simple:
- Open a HELOC and borrow funds at a lower interest rate.
- Use those funds to make a large lump-sum payment on your mortgage.
- Pay down the HELOC over time, ideally at a lower rate than your original mortgage.
If your HELOC rate is higher than your mortgage rate, this strategy won’t save you money and could even cost you more in the long run.
How Interest Rates Impact Your Payments
HELOC rates are typically tied to the prime rate, meaning they can go up and down. This means your monthly payment could go up if interest rates rise. That’s why it’s important to understand how your current mortgage rate compares to a HELOC.
If you’re considering this strategy, it’s crucial that you check both the current HELOC rate and potential future rate increases to see if this strategy will actually save you money. It’s also good to make sure you have a plan to pay off the HELOC before rates climb too high.
Step-by-Step Guide to Paying Off Your Mortgage with a HELOC
If you’ve confirmed that your HELOC rate is lower than your mortgage rate, here’s how to use it wisely:
Assessing Your Home Equity and Credit Score
Lenders typically allow you to borrow up to 85% of your home’s equity, minus what you still owe on your mortgage. To qualify for the best rates, you’ll also need:
- A good credit score (typically 680+).
- A low debt-to-income (DTI) ratio to show you can handle the additional credit line.
- A steady income to manage payments.
Opening a HELOC Account and Setting Up Transfers
Once approved, your lender will give you access to a credit line that you can withdraw from as needed. To pay off your mortgage, you’ll typically transfer a portion of your HELOC funds directly to your mortgage lender.
Making Lump Sum Payments on Your Mortgage
Use the HELOC funds to pay off your entire remaining mortgage balance. This means you’ll no longer have a monthly mortgage payment—but instead, you’ll make payments on your HELOC instead.
Managing Repayments and Avoiding Common Pitfalls
Since HELOC rates are typically variable, focus on paying it off as quickly as possible to minimize the risk of rising interest rates. Consider:
- Making extra payments whenever possible.
- Avoiding unnecessary withdrawals from your HELOC.
- Keeping an eye on rate changes and refinancing if needed.
Some HELOCs also offer the option to convert your balance to a fixed-rate loan, which would lock in your rate and protect you against rate fluctuations.
Pros and Cons of Using a HELOC for Mortgage Payoff
Before diving in, weigh the advantages and risks of this strategy.
Benefits of Faster Mortgage Payoff
- Lower Interest Costs: If your HELOC rate is lower than your mortgage rate, you can save on interest.
- Faster Mortgage Payoff: A large principal payment reduces your loan balance.
- Flexible Repayment: HELOCs allow you to borrow and repay on your schedule.
- Interest-Only Payments During the Draw Period: This can provide short-term cash flow relief.
Risks and Considerations Before You Start
- Variable Interest Rates: Your HELOC payment could rise unexpectedly.
- Risk of Foreclosure: If you can’t keep up with payments, you could risk losing your home.
- Temptation to Overspend: A HELOC’s revolving nature makes it easy to borrow more than necessary.
- Shorter Repayment Period: Unlike a 30-year mortgage, HELOC repayment periods are usually 10–20 years.
- Not Always a Money-Saving Move: If HELOC rates rise above your mortgage rate, this strategy loses its advantage.
Is a HELOC Mortgage Payoff Strategy Right for You?
Using a HELOC to pay off your mortgage can be a money-saving move for the right homeowner. You might be a good candidate if:
- Your HELOC rate is lower than your mortgage rate.
- You have a strong repayment plan for the HELOC.
- You’re comfortable with variable interest rates.
- You’re looking for a way to pay off your mortgage faster.
HELOC vs refinance? If you’re risk-averse or unsure about handling fluctuating interest rates, it might be best to stick with your traditional mortgage. If your HELOC rate is higher than your mortgage rate, this strategy won’t work in your favor. Instead, consider other options like making extra mortgage payments or refinancing to a lower fixed-rate loan.
Open a HELOC in Washington with Salal Credit Union
Discover Salal’s Custom Fit Home Equity, which combines the best parts of two traditional home equity solutions, giving you more financial flexibility—including the option of moving your HELOC balance over to a fixed-rate loan segment to lock in your rate.
