However, using a HELOC to pay off a mortgage is usually not a good idea—and we’ll explain why
What Is a HELOC or Home Equity Line of Credit?
A HELOC, the nickname for a home equity line of credit, is a second mortgage in the form of a line of credit. Equity is the amount your property is currently worth, minus the mortgage balance amount. Unlike a home equity loan, HELOCs usually have adjustable interest rates. HELOCs use your home as collateral for the loan. This may put your home at risk if your payment is late or you can’t make your payment at all. “You can get approved for a HELOC—say it’s for $100,000—and the bank will allow you to borrow as little or as much of that as you want,” Melissa Cohn, executive mortgage banker at William Raveis Mortgage, said to The Balance by email. “You are only required to make interest-only payments on a HELOC for what is called the ‘draw’ period, which is usually the first 10 years.” And if you repay the principal amount that is borrowed, she said you’ll be able to borrow and then pay it back again as often you want to, during the draw period. “At the end of the draw period, the loan gets repaid over the remaining 20-year term.” This makes a HELOC a popular choice for home improvement projects, and paying down high-interest bills, in addition to other uses. But should you get one to pay off your mortgage?
What To Consider When Refinancing With a HELOC
If you’re considering refinancing with a HELOC, Cohn doesn’t recommend doing so. To get a HELOC for any reason, you first would need to determine how much equity you have in your home and how much is still owed on the mortgage, in addition to your current monthly payments and how they would be affected by the HELOC.
The Pros and Cons of Using a HELOC To Pay Off Your Mortgage
Pros of Refinancing With a HELOC Explained
If you only have a few years left on a higher-interest-rate mortgage, a HELOC may (emphasis on the may) be advantageous because you’ll be paying less interest.
Also, you may be able to get an introductory rate at a further discount (similar to credit cards that are offered at enticing introductory rates). While HELOCs tend to have variable rates, you may be able to convert it to a fixed rate.
Cons of Refinancing With a HELOC Explained
“HELOC rates are generally higher than mortgage rates,” Cohn said. If the HELOC rate is higher than, or even equal to your current rate, it’s probably not a good idea to refinance your mortgage. “Also, the rate of the HELOC is set as a percentage over the prime rate, and it can adjust monthly, that’s why HELOCs are best when you can pay the loan back quickly—they are not good long-term,” Cohn said.
While a HELOC can be a good idea to finance home improvement projects or pay off credit cards, or medical bills with lower-interest-rate funds, HELOC rates are still usually higher than those of a regular mortgage because they can rise over time. That makes it a bad option to pay down a mortgage.
