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Mike De Socio is a freelance journalist, writer and photographer based in upstate New York, covering cities,…
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If you’re like many homeowners, you’re probably sitting on a lot of home equity right now and wondering if you can put it to good use.
“People have a lot more equity than they have [had] in the past,” says Matthew Locke, national mortgage sales manager at UMB Bank. Home value growth in 2021 — spurred by soaring home prices amid a competitive housing market — exceeded median salaries in 25 of 38 major metros, according to real estate marketplace Zillow.
Funding home renovations and consolidating debt are two tried-and-true uses for your home equity, but what if you want to use it to pay off your primary mortgage?
Using a home equity line of credit (HELOC) to pay off your mortgage is possible, but it depends on how much equity you have and how large the remaining balance on your mortgage is. Doing so could save you money if you’re able to get a significantly lower interest rate than your current mortgage rate, but this strategy also carries significant risks. HELOCs are variable rate products, meaning your interest rate and monthly payment could unexpectedly change at any time — a likely possibility given the current rising rate environment.
Here’s how using a HELOC to pay off your mortgage can work, and the key drawbacks and considerations experts say you should be aware of before you jump in.
Let’s start with the basics: A home equity line of credit, or HELOC, is a revolving line of credit that acts as a “second mortgage” on your house and allows you to borrow against your home equity. It works something like a credit card: You can spend the balance as much or as little as you want during the draw period, up to a certain limit, and then pay back only what you use.
It can be an attractive option for many different reasons — namely flexibility and low or no closing costs — and a lot of borrowers are using them these days to fund home renovations.
Using a HELOC to pay off your mortgage is more unconventional, but it can be done, Locke says.
Here’s how it would work: Let’s say you had a 30-year mortgage with a principal balance of $300,000 and an interest rate of 6 percent. After 27 years of payments, the remaining balance on your mortgage is now $58,149, according to NextAdvisor’s loan amortization calculator. If your house is now worth $500,000, that means you have a little more than $440,000 in equity to work with.
You could take out $58,149 from a HELOC with a lower interest rate — for example, 3 percent — and use it to pay off the mortgage. Then you’d pay off the HELOC as normal, allowing you to save on interest.
There are some limits to this strategy, though. Banks are usually only willing to lend up to 80 percent of the value of your home. In other words, the balance of your mortgage plus the balance of your HELOC can only add up to 80 percent of your total home value — leaving 20 percent of the equity intact. Your remaining mortgage balance must also be smaller than your HELOC credit line if you want to use a HELOC to pay off your mortgage in full.
Depending on your situation, there can be some benefits to using this strategy.
There are some significant risks to using a HELOC to pay off your mortgage that you should also be aware of.
Whether to use a HELOC to pay off your mortgage is a decision that depends a lot on your personal situation, but it should also be informed by what’s going on in the financial market. The biggest factor in today’s market, experts say, is the trend of rising interest rates.
“Right now, those disadvantages are really strong, because typically home equity loans are variable interest rates. We’re in an environment where interest rates are rapidly increasing,” Locke says.
That means that the main potential benefit of using a HELOC to pay off your mortgage — a lower interest rate — will probably disappear quickly and leave you with an unpredictable monthly payment.
“Why would you trade a low-cost fixed rate on your regular mortgage for a variable rate that could go up?” Burns points out. Especially if you took out your mortgage in the last few years — when rates have been historically low — trading it for a HELOC is unlikely to benefit you.
Instead of rushing to pay off your mortgage — which Burns said is usually “good debt” — she recommends focusing on other debts first.
“Get rid of credit card [debt] first, get rid of student loans, get rid of car payments,” Burns says.
Paying off your mortgage early isn’t always the best idea. There may be more productive uses for your money.
Your debt strategy also depends on your age, Burns says. In your 20s, 30s, or 40s, there’s nothing wrong with having a mortgage payment. These are the years you should be focused on paying off the aforementioned “bad debts” and saving for retirement, she explains.
It’s not until you get much closer to retirement that you should start thinking about how to eliminate your mortgage payment.
“In your 50s, if you still have a house payment, that’s when you need to get really aggressive,” Burns says.
If you take Burns’ advice and eliminate other forms of debt, you might have a few hundred extra dollars every month to put towards your mortgage. Here are some strategies for paying off your mortgage sooner without resorting to a HELOC:
All of that said, you may not want to pay your mortgage off early at all. As Burns says, it isn’t always necessary, especially if you’re younger. Locke also says it might not be a good move, especially if your interest rate is low, because the extra money could be put to better use in an investment account, for example.
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