Can I Use a HELOC to Pay Off My Mortgage?

A home equity line of credit (HELOC) is an open-ended product that allows you to tap into your home’s equity as needed. You can use HELOC funds for any purpose, including paying off a mortgage.

When you pay off your mortgage with a HELOC, your HELOC replaces your mortgage as the first lien on the property. But is swapping one home-secured debt with another the right decision? It might be. Keep reading to find out.

How to use a HELOC to pay off a mortgage faster

Replacing your mortgage with a HELOC is a multi-step process. It’s not difficult, but it requires forethought and planning. You’ll gather details about your mortgage, apply for a HELOC, and then withdraw from the HELOC to pay off your mortgage. 

Here’s how it works in more detail:

1. Contact your mortgage lender for a payoff quote. You won’t know what size HELOC you need without knowing what you owe on your mortgage. 
2. Estimate your home’s value. Use real estate listing sites like Zillow to get a rough idea. This will help you calculate your home equity and determine how much you can borrow.
3. Apply for a HELOC. Check your rates with the best HELOC lenders, then submit a full application when you find a loan offer you like.
4. Get an appraisal. Before closing your HELOC, your new lender will order an appraisal. This official property assessment will help finalize your HELOC amount and tell you how much cash you’ll have for a mortgage payoff.
5. Review and accept your HELOC. After the appraisal, your HELOC lender will send you a HELOC disclosure agreement. Take note of the draw and repayment periods, and sign your documents to accept the HELOC.
6. Withdraw from your HELOC. Once your HELOC is funded, withdraw the funds you need to cover your mortgage.
7. Pay off your mortgage. Follow the mortgage payment steps you take every month. But this time, you’ll pay off your home loan in full.

Tip

Getting a HELOC can take six weeks, so don’t wait until just before your mortgage is due to look for a line of credit. 

How much can I borrow with a HELOC to pay off my mortgage?

As you start applying for HELOCs, it may be helpful to understand how HELOCs work and how lenders determine your borrowing limit.

For example, say you have 15 years remaining on your mortgage. You owe $190,000 on the loan, with an interest rate of 7.75%, and your home is worth $450,000. That means you have $260,000 in equity.

Many lenders will allow you to borrow a maximum combined loan-to-value ratio (CLTV) of 70% to 90%. In other words, your combined home-related debt—including your current mortgage—can’t exceed 70% to 90% of your home’s value.

For this example, let’s say you choose a lender with a maximum CLTV of 85%. The largest HELOC you can get with this lender is $192,500.

Imagine getting approved for a HELOC with an interest rate of 5.25%. In this case, you could take out the entire $192,500 line of credit and use the funds to pay off your remaining $190,000 mortgage balance, closing out your original mortgage loan with its 7.75% rate.

You would then have two options for repaying the HELOC:

• Make interest-only payments on your HELOC for the rest of its draw period (often 10 years). If your mortgage payment was $1,850 monthly, and your interest-only HELOC payment is $400, you now have $1,450 each month for other financial goals.
• Keep making your old monthly payment toward your HELOC. After all, you’re already budgeting for that payment, so it may be easy to maintain. The benefit is paying off your HELOC ahead of schedule. Since the HELOC has a lower interest rate than your mortgage loan, you can pay your principal balance faster. 

The lower the interest rate on your balance, the less you’ll pay in interest over the same repayment period. However, be aware that many HELOCs have variable, rather than fixed, interest rates. This could help or hurt you, depending on whether your HELOC rate goes up or down.

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

Using a HELOC to pay off a mortgage offers homeowners several real benefits, but be aware there are drawbacks to consider as well.

Pros

• Possibly pay less interest

  If your HELOC comes with a lower interest rate than your mortgage, you could save hundreds or thousands by using your HELOC to eliminate your mortgage. Remember, though: Interest rates are often variable. Your best bet may be a fixed-rate HELOC if you can find one.

• Lower monthly payments

  You’re only required to pay interest during your HELOC’s draw period. There’s a good chance these interest-only payments are less than your monthly mortgage payments, freeing up cash to cover other expenses.

• Access to additional funds

  Mortgage payoffs are just one of many HELOC uses. As you pay back your HELOC (or if you didn’t max it out to pay off your mortgage), you can withdraw more money for other purchases.

• Faster loan payoff

  By using a HELOC to pay off a mortgage, you may be able to become debt-free faster. If the HELOC has a lower interest rate and you can pay the difference toward your principal, you’ll pay off the loan faster.

Cons

• Replacing debt, not reducing it

  Paying off one form of debt with another can save you money in the long run, but it doesn’t reduce your debt obligation.

• Switching to a variable interest rate

  If you’re paying off a fixed-rate mortgage with a variable-rate HELOC, prepare for fluctuating payments. HELOC rates can change monthly, so while your payments may be lower during your draw period, they won’t be consistent.

• Higher rates possible

  Because of your HELOC’s variable rate, there may be times when your new interest rate is higher than your mortgage rate. There’s no real way to predict that ahead of time; it’s simply a risk you take when you open a HELOC.

• Potential to miss out on tax deductions

  Mortgage interest is tax-deductible, but that’s not always the case for HELOC interest. Whether you qualify for a tax deduction for your HELOC interest depends on when you opened the HELOC, how you used the funds, and whether you itemize your deductions when you file your taxes.

The relative benefits and drawbacks of using your HELOC to pay off your mortgage depend almost entirely on your HELOC rate and repayment habits. These strategies can help you combat any potential volatility:

Pick a HELOC with a fixed rate

Not all have variable interest rates. If you want to hedge your bets against a possible rate increase, choose a lender (such as Figure) that offers fixed-rate HELOCs. Depending on the overall interest rate environment, your starting rate may be higher than a variable-rate HELOC, but you’ll have peace of mind.

Choose a HELOC that allows you to lock in rates

HELOCs with fixed-rate conversion options allow borrowers to “lock” their rate at specific points of the draw period. If you plan to borrow a large chunk to pay off your home mortgage balance, you may be able to secure your rate just after opening the line of credit. 

Pay off your HELOC balance as soon as possible

Instead of paying interest during your draw period, pay as much as possible toward your monthly balance. The sooner you pay off your borrowed home equity, the less you’ll pay in interest, and the earlier you’ll get out of debt.

Will I pay off my mortgage faster with a HELOC?

Generally speaking, you can pay off your mortgage faster with a HELOC if your HELOC interest rate is lower and you pay the same amount toward your HELOC as you did your mortgage.

Assume, for example, you owe $200,000 on your mortgage with a 7.5% rate. You withdraw $200,000 from a HELOC with a 5.5% rate to cover your mortgage balance.

If you pay $1,500 on your mortgage every month, it will take about 24 more years to pay it off. If you put that same $1,500 toward a lower-interest HELOC, you could own your home free and clear in about 17 years.

Loan type	Payment	Time to pay off
Mortgage (7.5% rate)	$1,500	24 years
HELOC (5.5% rate)	$1,500	17 years

Remember, HELOC rates can change over time. It’s possible the interest rate will go up and thus make it harder to pay off the loan earlier than you would have if you’d left the mortgage alone.

Does having a mortgage make it difficult to get a HELOC?

Having a mortgage won’t necessarily prevent you from getting approved for a HELOC, but it will reduce the size of your HELOC.

Lenders often won’t let you borrow 100% of your home’s equity through a HELOC, instead limiting your HELOC to 70% to 90% of your equity, minus any outstanding debt obligations. 

In our earlier example, your lender set its CLTV threshold at 85%. In theory, you could borrow $382,500. But because you still owed $190,000 on your mortgage, you could only borrow the difference between that $382,500 limit and your unpaid mortgage balance:

Your CLTV considers all the liens against your property, not just your mortgage. For example, second mortgages and home equity loans will decrease what you can borrow with a HELOC. 

Your income, credit score, and zip code can also affect your HELOC amount. Knowing and understanding these HELOC requirements can help you determine if you’re likely to qualify and for how much.

Lenders reserve their maximum CLTV for the most eligible borrowers, so if your credit score or income is lower, your debt-to-income ratio (DTI) is higher, or you’re located in certain states, your HELOC limit could be lower.

What fees will I pay for a HELOC to pay off a mortgage?

Aside from interest, HELOCs can come with additional costs, such as closing costs and annual maintenance fees. The most common HELOC fees include:

• Closing costs: Lenders charge closing costs to offset their administrative expenses. These can include application and origination fees and credit check costs. These are roughly 2% to 5% of the total loan cost, but they vary by lender.
• Appraisal fees: Depending on your lender, your home’s value, and when you purchased the property, you may need a new appraisal before you take out a HELOC. If necessary, your lender will order the appraisal, but it might pass the cost on to you. On average, an appraisal costs between $600 and $2,000; this can vary depending on the size of the home and where you live.
• Annual fees: Many lenders charge for HELOCs, even if you don’t borrow from the line of credit. Lenders may waive these fees if you meet other requirements, such as maintaining a checking account through the same bank. These fees are generally minimal, often between $50 and $100.

Most HELOC lenders let you pay off your balance early without a penalty. However, that may not be the case if your lender pays your closing costs for you. Mortgage lenders may also charge a prepayment penalty for paying off your mortgage ahead of schedule.

If your lender covers your closing costs, you may be required to keep your HELOC open for a minimum period (often three years) to avoid additional fees.

Shopping around can help you reduce fees or avoid them altogether, so we recommend comparing several HELOC lenders to see which is best for you.

Alternatives to using a HELOC to pay off my mortgage

Not sure whether a HELOC is the right choice to pay off your mortgage balance? 

Alternatives include the following:

• Home equity loans: Similar to a HELOC, a home equity loan allows you to borrow against a portion of your home’s available equity in one lump sum. While LTV limits are often similar to HELOC limits, home equity loans have one major benefit: fixed interest rates. In unpredictable rate trends, anticipating your home equity loan payments can offer peace of mind.
• Mortgage refinance loan: Another option is to replace your current mortgage with a new refinance mortgage loan. Depending on your current mortgage rates and terms and your goals, you may be able to reduce your interest rate, adjust your monthly payment obligation, remove a co-borrower, or a blend of the three.

FAQ

Can you refinance a mortgage with a HELOC? 

Refinancing a mortgage and taking out a HELOC are two separate ways to tackle tough mortgage payments. However, you can use a home equity line of credit to pay off your mortgage.

How can I calculate the savings of using a HELOC to pay off my mortgage?

To calculate your savings from using a HELOC to pay off your mortgage, you must:

• Determine how much you have left to spend over the life of your mortgage, including principal and interest. You can refer to your loan amortization schedule to determine how much you’ll still spend over the remaining years.
• Determine what your total HELOC cost would be, including principal and interest.
• Subtract the HELOC total from the mortgage total to calculate the savings.

However, several elements could throw a wrench into this plan:

• HELOCs are traditionally variable-rate, meaning you cannot assume a steady interest rate over the life of the line of credit—and there’s no way to predict what interest rates will be in the future.
• HELOCs may have closing costs and annual fees that eat into any savings you may access from paying off your mortgage with one.
• You could potentially make larger payments toward your principal balance during the HELOC’s draw period to save a lot of money on interest and thus further maximize your savings.

Are there tax implications for using a HELOC to pay off my mortgage?

Homeowners can deduct their mortgage interest from their taxable income. If itemizing deductions, this can be a big help come tax time. HELOCs do not necessarily offer the same benefit, so you may lose out on that tax advantage if you use a HELOC to pay off your mortgage.

What factors should I consider before using a HELOC for mortgage repayment?

If you’re considering using a HELOC to pay off your mortgage, you’ll want to consider a few factors:

• HELOC costs: Though a HELOC may look more affordable than your existing mortgage, don’t forget that there are often closing costs and annual fees with a mortgage.
• Variable rates: While a HELOC may look attractive when rates are low, remember that rates can jump at any moment—potentially making a HELOC more expensive than your mortgage.
• Temptation: Like a credit card, a HELOC has a revolving line of credit. You may be tempted to make additional withdrawals to fund other purchases, which can increase your debt.