Using a HELOC to pay off your mortgage

A mortgage is typically a long-term commitment. If you have a traditional 30-year home loan, you could spend a good chunk of your adult life paying it off. A large part of your monthly payment, especially in the early years, goes toward interest charges—while your principal seems to decline at a crawl. 

If you’re looking for a way to speed up the process and potentially save on interest compared to the remaining life of your original mortgage, you may have heard you can use a home equity line of credit (HELOC) to pay off a mortgage.

Using a HELOC to pay off your mortgage is an unorthodox strategy, and it’s rarely the best move. You’d be adding another debt secured by your home, often at a variable rate. Some people consider it since you could potentially reduce interest charges, but it's not the only strategy. You could also lower the amount of interest you pay by making extra mortgage payments.

How using a HELOC to pay off your mortgage works

A HELOC lets you borrow against your home equity, which is the difference between the value of your home and your mortgage balance. Here’s an overview of how a HELOC works: it starts with a draw period, when you can borrow, repay, and borrow again. After that, you enter the repayment period and can’t make any more withdrawals.

Using a HELOC to pay off your mortgage works just like it sounds: 

• You draw from your HELOC and use the money to make a large lump-sum payment toward your mortgage. 

• Then, you aggressively pay down your HELOC and repeat the process if you like. 

The best-case scenario is that you pay down your mortgage faster than making traditional minimum payments and pay less interest. This tactic, where you use a line of credit to speed up debt payoff, is also known as velocity banking.

Here's a simplified example:

• You have $100,000 left on your mortgage.

• You open a HELOC with a $50,000 limit.

• You use the HELOC to pay down half your remaining mortgage balance, then redirect your income toward paying off the HELOC as fast as possible.

While this all may seem reasonable, most homeowners are better off simply making extra mortgage payments. You could accomplish the same goal without going through the HELOC application process or getting a second mortgage on your home.

When could it make sense to use a HELOC to pay off your mortgage?

Look for these conditions if you want to pay off your mortgage with a HELOC:

• Your HELOC interest rate is meaningfully lower than your mortgage rate. If not, you’re unlikely to save money overall.

• You can qualify for a HELOC that’s large enough to make a dent in your mortgage balance.

• You have consistent income that comfortably exceeds your expenses. This strategy generally only works if you aggressively pay your HELOC every month.

• You have the financial discipline to pay back your HELOC as quickly as possible.

If any of these conditions aren’t met, using a HELOC to pay your mortgage probably doesn’t make sense. Even if you can check off all of them, carefully consider whether this strategy is the right move.

The risks of using a HELOC to pay off your mortgage

Here are the main reasons why using a HELOC to pay off your mortgage is usually a bad idea:

• The interest rate may go up. Most HELOCs have variable interest rates. If rates increase, your payment could increase, too. You don’t have this risk with a fixed-rate mortgage.

• You could pay additional fees. Closing costs and fees for a home equity loan or HELOC are usually about 2% to 5% of the loan amount. On a $50,000 HELOC, that would mean paying $1,000 to $2,500. If you just make extra mortgage payments, you’d skip the fees entirely.

• Your home is on the line. You’ll have two debts, your mortgage and your HELOC, secured by your home. You're also tying up your equity in a HELOC, so you could go underwater if housing prices go down.

• Easy access to credit could cause overspending. As you pay down a HELOC, the credit becomes available again. Some homeowners may be tempted to spend more in this situation.

HELOC vs. refinancing your mortgage

A HELOC is a second mortgage that sits alongside your first mortgage as a separate line of credit. A refinance replaces your existing mortgage with a new one, typically at a new interest rate and term.

If you want to refinance and borrow against your equity, you could opt for a cash-out refinance. You get a larger mortgage based on your home’s current value, pay off your old mortgage, and receive the difference as a cash payment. Check out our HELOC vs. cash-out refinance guide if you’re deciding between these two options.

HELOCs and refinances are also different types of debt. A HELOC is revolving debt, which is why you can borrow from it again as you pay down your balance during the draw period. A refinance is a one-time installment loan, just like your original mortgage.

Finally, the cost structures are different for HELOCs and refinances. Refinancing normally has higher closing costs, because you’re getting an entirely new mortgage. HELOCs often have lower closing costs in comparison but may have ongoing costs. Most refinances also have fixed interest rates, not variable rates like many HELOCs.

Whether you want to save on interest, pay off your mortgage early, or both, you probably have better options than so-called velocity banking. You may be able to refinance at a lower rate. If you have extra money available, making extra payments is a straightforward approach that could make a big difference in your payoff timeline and how much you pay overall.