Can You Use a HELOC to Pay Off Your Mortgage?

One of the benefits of a HELOC is that it can be used for almost any purpose, including paying off your mortgage. But is using a HELOC to pay off your mortgage a smart financial move? Let’s look at how a HELOC works and the pros and cons of using a HELOC for mortgage payoff. 

What is a HELOC?

A home equity line of credit (HELOC) is an open line of credit that lets you borrow against the equity in your house. Unlike a home equity loan, which comes with a one-time lump sum payment, a HELOC allows you to continue borrowing and repaying the funds over several years. 

There are two distinct phases of taking out a HELOC — a draw period and a repayment period. The draw period typically lasts 10 years, and during this time, you can spend up to your credit limit without needing to repay anything.

Once the draw period ends, you’ll stop borrowing funds from your HELOC and enter the repayment period. This period lasts 10 to 20 years, and you’ll make monthly payments to pay down the balance.

Can you use a HELOC to pay off your mortgage?

Yes, you can use a HELOC to pay off your mortgage, but it may not be the best option. “I would not recommend using a HELOC to pay off a mortgage,” said Jennifer Beeston, SVP of mortgage lending at Rate. 

“HELOCs traditionally have higher rates than fixed mortgages, and most are variable. It’s a higher-risk product with higher rates so I see zero reason to use it to pay off a fixed mortgage.”

According to Becky Conner-McDuffy, a senior loan advisor at Penny Lane Financial, a HELOC can be used for almost anything, from consolidating debt to paying for home improvements. But she says using one to pay off your mortgage depends heavily on interest rates. 

“With HELOCs tied to the prime rate and often adjusted for credit scores and loan-to-value ratios, they typically carry higher rates than traditional mortgages," she explains. For that reason, she doesn’t advise this strategy either.

Pros and cons of using a HELOC to pay off your mortgage

Pros

• Low interest rates: “If current HELOC rates are lower than your mortgage interest rate, you could save money by using a HELOC to refinance your mortgage debt,” said Steven Kibbel, CFP®, ChFC®, and CLU®. “This is especially true if you’re locked into a higher fixed rate on your current loan.”
• Flexible payments: Kibbel says that many HELOCs offer interest-only payments during the initial draw period, which can significantly reduce monthly outlays. “This breathing room might be useful if you’re anticipating a financial windfall or simply need some extra liquidity in the short term,” he added.
• Access to additional funds: A HELOC also leaves you with access to any remaining credit, which can be helpful with home improvements, debt consolidation, and other financial priorities.

Cons

• Upfront costs: Depending on your lender, there may be upfront costs associated with taking out a HELOC. You might be responsible for appraisal and application fees, as well as closing costs. Each of these fees will add to the total cost of the loan. 
• Variable interest rates: Because HELOCs usually come with variable interest rates, your payments can change from month to month. This lack of predictability can make it harder to budget for your monthly repayments. 
• Your home is collateral: A HELOC is secured using your home equity, so if you’re unable to make the loan payments, you could lose your home. You should only consider a HELOC if you’re confident you can handle the repayments. 

How to qualify

Before you can decide whether using a HELOC to pay off your mortgage makes sense, you need to qualify for the loan. Here are the top HELOC qualification requirements:

• Increase your home’s LTV ratio: Your LTV ratio is calculated by dividing your mortgage amount by the appraised value of your home. Most lenders look for a max LTV ratio of 85%. You can increase your LTV ratio by paying down your mortgage or by waiting for your property values to go up.
• Improve your credit score: Your credit score is one of the main factors lenders consider when evaluating you for a loan since it indicates that you’re less of a lending risk. You can improve your credit score by paying down any outstanding debt. 
• Consider using a cosigner: If your credit score isn’t as high as you’d like, you might consider applying with a creditworthy cosigner. You can take advantage of that individual’s high credit score to help you qualify for the loan. 

Alternatives to consider

Before taking out a HELOC to pay off your mortgage, you might consider refinancing your existing mortgage. When you refinance, you pay off your current mortgage with a new loan.

Refinancing may be a good option if you can qualify for lower interest rates than what you currently have. You can also change your loan terms — for example, you could switch from a 30-year mortgage to 15-year loan terms, thus paying off your mortgage faster. 

Seniors can also consider a reverse mortgage, which allows you to borrow money using your home as security for the loan. If you qualify, you won’t have to make any monthly payments, and the loan will be repaid once you’re no longer living there.

HELOC for mortgage FAQ

You’ll want to carefully weigh your options before taking out a HELOC to pay off your mortgage. Let’s look at some additional information to consider first.