Should you use a HELOC to pay off a mortgage?

You've been paying down your mortgage for years, and you're finally at the point that your equity has outpaced your mortgage. Now you're wondering if you should refinance with a HELOC for more flexible borrowing.

Using a home equity line of credit (HELOC) to pay off a mortgage could make sense if the math works out. This approach can offer flexibility and potential interest savings in some situations, but it could introduce variable rates and other long-term financial trade-offs.

Can you use a HELOC to pay off a mortgage?

Yes, you can use HELOC funds to pay off your mortgage—but you probably shouldn't. 

In general, mortgages tend to be cheaper than HELOCs. Your current mortgage probably has a lower interest rate than any HELOC could offer. Mortgage payments are fixed and predictable, while many HELOCs have variable rates.

That said, one potential advantage of using a HELOC to pay off a mortgage is that you might have lower payments during the HELOC's draw period. Some lenders have you make interest-only payments in the draw period. You won't put money toward your principal, which could lower your monthly payment, but you also won't make progress paying down your principal balance.

Additionally, once the HELOC repayment period begins, your monthly payment will likely go up quite significantly. Unless you’re prepared for a higher monthly payment and have a plan to make a full payoff of your mortgage debt during the HELOC repayment period, the HELOC might be too risky. 

Why HELOC rates are usually higher

Most traditional HELOCs are known as second mortgages or second lien HELOCs. The primary mortgage or first lien is typically the mortgage you used to buy the home. The first-lien mortgage gets paid off first in the event of foreclosure, and the second-lien mortgage gets paid out of what's left.

Since the HELOC lender is second in line, the risk of not getting repaid is higher. The extra risk is a big part of why HELOC interest rates tend to be higher than rates for first-lien purchase or refinance mortgage loans.

HELOC vs. mortgage

If you’re trying to decide between HELOC vs. mortgage, it’s important to be clear about your financial goals. Do you want to have stability and build equity in a house while paying the monthly mortgage bill, or do you want to access cash from your home equity—in exchange for some unpredictability and extra cost? 

Here’s a quick breakdown of a first-lien HELOC vs. mortgage: 

When using a HELOC to pay off a mortgage might make sense

Paying off your mortgage with a HELOC isn’t the right choice for most people. If you’re in one of these financial situations, it might be worth considering. 

You qualify for a HELOC at a significantly lower interest rate 

If you got your current mortgage when rates were much higher, a HELOC at today's rates could be lower. This could be particularly true if you've improved your credit quite a bit since you got your mortgage.

Your mortgage balance is very low relative to your equity

Suppose you have 90% equity in your home and want to do some renovations. You don't want two loans to pay, so you get a HELOC large enough to cover your existing mortgage and the renovations. This could be a simple way to meet your goals. You should still crunch the numbers to make sure a higher interest rate and closing costs won't add to your overall cost too much.

You're willing to pay closing costs on a larger HELOC

Fees vary a lot by lender, but some HELOC fees could be based on a percentage of your maximum credit line. In that case, getting a larger HELOC so you can pay off your mortgage on top of any other needs would mean higher loan fees.

This isn't always the case—-some HELOC lenders may have low or no loan fees, or they may charge a flat fee rather than a percentage. Get a complete loan schedule from your lender so you can see any and all potential fees.

When it usually doesn’t make sense

On the other hand, you might prefer to stick with your traditional mortgage. Paying off a mortgage with a HELOC might not be the right choice if you: 

• Have a low fixed-rate first mortgage. If you’re already comfortable with your mortgage interest rate and are unlikely to find a lower rate by refinancing, getting a first-lien HELOC is probably not a better deal. 

• Want a fixed-rate home loan. Many HELOCs have variable interest rates. If you prefer a fixed rate mortgage or you want to be protected against the risks of rising interest rates, staying with your existing mortgage might feel like a better choice than switching to a variable rate HELOC.

• Don’t want a higher payment. If paying off your mortgage with a HELOC would leave you with a higher payment or you don’t want the risk of borrowing more money from a HELOC and ending up with more home mortgage debt, getting a first-lien HELOC probably isn’t right for you.  

Risks to understand before using a HELOC this way

Getting a HELOC to pay off your mortgage is not a magic wand to get rid of debt for free. If you’re not careful, it could leave you in worse financial shape. Here are a few risks of using a HELOC to pay off a mortgage: 

• Higher interest rates. HELOCs typically have higher interest rates than mortgages, so you may end up paying more for your mortgage this way.

• Loan fees. Most lenders charge fees for a HELOC that could include application and transaction fees, as well as monthly or annual account fees.

• Longer in debt. Depending on the term of your HELOC, you could end up taking longer to pay off your home and own it free and clear than if you just stuck with your mortgage.

• Potential rate volatility. Unless you get a fixed-rate HELOC, you might face higher payments if interest rates go up. 

• Payment shock. If the new HELOC has a shorter repayment period or higher interest rate than your old mortgage, you might suddenly be hit with larger payments. This could also be a factor if you make interest-only payments during the draw period and aren't prepared for the payment increase when the repayment period begins.

• Foreclosure risk. A HELOC is still a type of mortgage, so foreclosure is still possible if you stop making payments on the HELOC.

Alternatives to using a HELOC to pay off your mortgage

Using a HELOC to pay off your mortgage could be a good choice for a select group of people with unique financial goals. However, most homeowners should consider different solutions. 

Here are a few alternatives to paying off a mortgage with a HELOC: 

• Mortgage refinance. If you qualify for a lower interest rate, refinancing your mortgage can help you reduce your monthly payments and save money on interest over the life of the loan. 

• Extra principal payments. Making extra payments each month is a good strategy to pay off your mortgage faster. 

• Get a HELOC on top of your mortgage. Instead of paying off your existing mortgage with a first-lien HELOC, keep your mortgage and get a typical second-lien HELOC. This can let you access cash to pay off other higher-interest debt, fund home renovations, or tackle other financial goals. Some lenders offer fixed-rate HELOCs. 

• Pay off other debts instead. If your mortgage rate is low and your payment is affordable, you might be better off leaving it be. You might put your extra cash toward paying off other debts or save for other financial goals. 

How to decide what’s right for you

Here are a few factors to consider before you decide to pay off a mortgage with HELOC: 

• Current mortgage rate. If your mortgage rate is already pretty low, a first-lien HELOC probably won't save you money. 

• Remaining balance and term. How much longer will it take to pay off your current mortgage? Are the payments affordable? You might be better off with a simple plan of paying down that mortgage faster (or putting cash toward other goals) instead of bothering with a HELOC you don't actually need.

• Long-term plans for the home. Do you want to spend some of your home equity, or just pay for your home? If you have big renovation plans or otherwise need to take cash out of your home equity, using a HELOC to pay off a mortgage could be a good strategy.

The idea of paying off your mortgage might feel nice, but using a HELOC to do so only shifts the debt—it doesn't get rid of it. While this could still be a worthwhile plan in some cases, it's probably not a great idea for most homeowners.