Using a HELOC to Pay Off Your Mortgage

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Owning a home is no easy feat. From obtaining a mortgage to worrying about every day expenses, there is a ton of things involved with homeownership. One of these is paying off your mortgage. With home prices increasing, homebuyers have to take out larger and larger mortgages. In 2020, the average American mortgage debt was roughly $215,000. Paying off your mortgage is definitely a financial goal for everyone. People are actually using creative ways to pay off their mortgage. One of these strategies is using a HELOC to pay off your mortgage.

Here we will detail the intricacies of using a HELOC to pay off your mortgage.

What is a HELOC?

Before we get into the details about using a HELOC to pay off your mortgage, let’s look at what a HELOC is. A HELOC stands for a home equity line of credit. This financial product works similar to a credit card.

You have a certain amount of funds available to you to use. You can take this money out when you need it. Once you pay off the outstanding balance, you have the full amount available to you to use again. Borrowers can withdraw and repay as many times as necessary. The ability to withdraw as little or as much as needed, versus taking out a large lump sum at once, has numerous benefits. These benefits range from flexibility to potentially lower interest rates.

The amount of funds you get approved for with a HELOC is based on the amount of equity you have in your home. The house or real estate property is the collateral. The risk you must consider when using your home as collateral is that you could lose it if you default on the payments. Using your home as collateral is common practice. You should consider your financial stability and credit history before making this decision.

Using a HELOC to Pay Off Your Mortgage

If you are thinking about using a HELOC to pay off your mortgage, you should familiarize yourself with the process.

First, you need to check the amount that you can borrow against your house. It should be equal to or greater the amount you own on your mortgage. If you get approved for the HELOC, take the funds and send it to the lender that holds your mortgage. Once you do this, you can start paying off the HELOC.

What are the risks?

There are always risks with taking out loans. It is important to speak to your accountant or financial advisor to see if the risks are worth the reward. For instance, if you chose to use your HELOC to pay off your mortgage and fall behind on payments, your lender can foreclose. However, this is also the case if you default on your mortgage.

Additionally, if you borrow the full amount available against your equity, you’ll still have to pay the same principal amount. Also, what if something happens and you need money? An example could be what if you need a new roof? In most cases, you would use your HELOC to pay for this. But if you just used your HELOC to pay off your mortgage, you won’t have any funds available to do this. If this is the case, lets hope you were able to build and emergency fund.

This method of mortgage repayment may be best for someone who has more equity than debt in their property. Also for those that can get a lower rate with a HELOC than their current mortgage, and has a stable income with positive cash flow. If you’re operating on a tight budget and have a lower monthly income, you may want to contact your lender to explore other options.

What are the benefits?

Using a HELOC to pay off your mortgage may be a great option for those that qualify for competitive interest rates. Over time, you could end up paying less. Traditional mortgage loans can accrue a ton of interest, so paying it off with a HELOC with a lower interest rate might make more sense.

Though you will still have to pay interest on a HELOC, these loans can often be obtained at lower rates. If you’re able to pay off the mortgage faster, less interest is accrued. This will save you money and lower the total cost to own the property.

A HELOC also offers flexibility. You aren’t required to borrow the remaining amount. Or, if you have more available than what’s necessary to repay your mortgage, you can use the remaining balance to renovate. By doing this, you will build more equity with the increased value of your home.

Should You Use a HELOC to Pay Off Your Mortgage?

Ultimately, this decision is yours. There are many risks and benefits to consider. If you are just looking to lower your monthly payment, then you may want to look into if you should refinance your mortgage instead. However, if you have a large amount of equity in your home and a strong positive cash flow each month, then using a HELOC to pay off your mortgage might be a great opportunity for you.