Can you use a HELOC to pay off your mortgage?

Using a HELOC to pay off your mortgage

You can use a HELOC to pay off your mortgage, but it’s not always a good idea. You’ll need to understand how HELOC interest rates work, how the payment will impact your cash flow and debt load, and whether it’s worth locking up your mortgage balance in a HELOC instead of a traditional home mortgage loan.

Using a HELOC to pay off your mortgage may help you lower your interest rates on your home loan, potentially giving you a smaller monthly payment. In general, HELOCs and home equity loans have slightly higher rates than a fixed home mortgage, but sometimes you can get a lower rate with certain lenders.

If you want to pay off your mortgage with home equity, you’ll need to borrow against the value of your home. You’ll need enough equity to pay off the remaining balance on your current mortgage.

Most HELOCs are limited to a certain percentage of your home’s value, typically around an 80% combined loan-to-value (LTV) ratio is allowed. So you’ll want to make sure you have enough home equity available to borrow within your lender’s HELOC limits to pay off your mortgage.

For example, if you owe $150,000 on your home mortgage, but your home is worth $450,000, you have $300,000 in home equity. If you borrow $150,000 in a HELOC (50% of your home equity), you can use the funds to pay off your mortgage.

» MORE: Can you get a HELOC on an investment property?

Benefits and risks of using a HELOC

A HELOC, which lets you borrow against your home equity, works more like a credit card than a traditional mortgage. You can access funds as needed, and your payment is based on the amount you borrow — not the full line of credit.

HELOCs are more flexible than standard home loans but generally come with higher rates — unless market conditions or a specific lender offer you a temporary advantage. If rates are falling and you qualify for a competitive HELOC offer, you might be able to pay off your mortgage at a lower rate — at least temporarily. This can reduce your payment and save money on interest, depending on how long the rate stays low.

Monthly payments on a HELOC are often lower than a traditional mortgage at first. That’s because some HELOCs offer interest-only payments or allow you to stretch your repayment over a longer term. For example, if you’ve been paying a 30-year mortgage for 10 years, you still have 20 years left — but your payment stays the same. If you pay off that balance with a HELOC and reset the timeline to 30 years, your monthly payment could drop because you’re spreading the debt over more time.

On the downside, it’s important to point out that paying off your main home mortgage with a HELOC is not getting rid of any debt, but rather transferring it to another type of loan. In general, HELOCs have higher rates than a traditional home loan, and you might have to pay closing costs on top of that.

HELOCs usually come with variable interest rates, which means your monthly payment could increase over time. These rates are tied to the federal funds rate set by the Federal Reserve. If inflation stays high and the Fed raises rates, your HELOC payment will likely rise too.

And while a longer repayment schedule for your HELOC can lower your monthly payment, it also extends the time it takes to pay off the loan. That can increase your total interest costs compared to sticking with your original mortgage.

» COMPARE: Best HELOC Lenders

HELOC alternatives to consider

While you can pay off your home mortgage with a HELOC, here are a few alternatives to consider that might be a better fit:

• Mortgage refinancing: When you refinance your mortgage, you effectively pay off your old mortgage with a new one. You can choose from different types of loan term lengths and types (fixed, adjustable rate) to lower your payment or interest rate. There are typically closing costs with these loans, so it’s important to compare the upfront expense with your potential savings.
• Home equity loans: Instead of tapping your home equity with a HELOC, you can get a more traditional term loan against your equity instead. Home equity loans offer various repayment terms, may have competitive low interest rates and could lower your monthly payments. Just make sure to calculate the total loan costs, especially if you’re extending the term of your loan.
• Personal loans: If you have a smaller mortgage balance, you might be able to pay it off with a personal loan. Personal loans are unsecured, and you can usually qualify for one online quickly. But since personal loans typically have high interest rates and you can’t deduct the interest paid on your tax return, it rarely makes sense to use this option.
• Paying in cash: If you have a large savings balance, you might consider paying off the remainder of your mortgage yourself. This will eliminate monthly principal and interest payments as well as lower your overall cost of living. But make sure you still have enough cash set aside for emergencies after the payoff.
• Mortgage recasting: If you don’t need to pay off your mortgage completely but want a lower monthly payment, you might consider recasting. This involves making a lump-sum payment toward your principal and asking your lender to adjust your payment based on the new, lower balance. Since the loan term and interest rate stay the same, your monthly payment goes down because you’re spreading a smaller balance over the same number of months.

  Not all lenders offer recasting, and it’s not available on all loan types, including those backed by the Federal Housing Administration or the United States Department of Agriculture. But if your loan qualifies, it can be a way to lower your payment without refinancing.

Is it worth it to pay off your mortgage with a HELOC?

Paying off your mortgage with a HELOC could be worth it if it fits your broader financial goals and you have a solid repayment plan.

You might see short-term savings if your HELOC has a lower interest rate or more flexible payment terms. But since HELOC rates are adjustable, your payments could increase if rates rise.

This strategy makes the most sense if you’re confident you can pay the HELOC off before retirement. Entering retirement without home debt can help keep your cost of living low.

On the other hand, it’s risky without a reliable income. Because your home secures the loan, missed payments could lead to foreclosure.

With the right repayment plan, a HELOC can support your long-term goals — just make sure the math works in your favor.