Can You Use a HELOC to Pay Off Your Mortgage?

Using a HELOC to pay off your mortgage

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.

Using a HELOC to pay off your mortgage might make sense if you can get a lower interest rate and monthly payment. But it’s important to consider that HELOC interest rates are adjustable, and the repayment terms might be longer than your existing mortgage.

HELOC borrowing limits

Most HELOCs are limited to a certain percentage of your home’s value. Typically, you can get around an 80% combined loan-to-value (LTV) ratio. 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’ll have $300,000 in home equity. If you borrow $150,000 in a HELOC, which is 50% of your home equity, you can use the funds to pay off your mortgage.

Benefits and risks of using a HELOC

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.

Benefits of using a HELOC

There are some benefits of using a HELOC to pay off a mortgage, such as potentially lower rates and lower payments.

Can take advantage of lower rates

If interest 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 you money on interest, depending on how long the rate stays low.

Reduce monthly payments

Monthly payments with a HELOC are often lower than a traditional mortgage, at least 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 and 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.

» COMPARE: Best HELOC Lenders

Drawbacks of using a HELOC

While you can use a HELOC to pay off a mortgage, it’s typically not a good idea.

Foreclosure risk if you miss payments

A HELOC can be risky because it’s secured to your home. This means missing payments gives the lender the right to foreclose on your home, just like with a mortgage.

Not actually paying off debt

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.

Higher rates and other costs

In general, HELOCs have higher interest rates than a traditional home loan, and you might have to pay closing costs on top of that. HELOCs also 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.

Longer repayment timeline

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.

HELOC alternatives to consider

While you can pay off your home mortgage with a HELOC, there 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 mortgage. You can choose from different types of loan term lengths and types, such as a fixed or 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 loan against your equity instead. Home equity loans offer various repayment terms and may have competitive interest rates, which 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.

Mortgage recasting

If you don’t need to pay off your mortgage completely but want a lower monthly payment, you might consider mortgage 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 (FDA) or the U.S. Department of Agriculture (USDA). But if your loan qualifies, it can be a way to lower your payment without refinancing.

Is paying off your mortgage with a HELOC worth it?

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. Generally, 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.

You might see short-term savings if your HELOC has a lower interest rate or more flexible payment terms. However, since HELOC rates are adjustable, your payments could increase if rates rise. Plus, taking out a HELOC is risky without a reliable income. Because your home secures the loan, missed payments could lead to foreclosure.