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Using a HELOC to pay off your mortgage

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Weigh savings on interest and PMI against this strategy’s significant risks.

A home equity line of credit can help you pay off your mortgage ahead of schedule. And what’s called a mortgage accelerator program can potentially eliminate your PMI and save you thousands in interest. But it’s a tricky financing strategy that requires an abundance of financial self-discipline over years, depending on how much you owe on your home.

Can I use a HELOC to pay off my mortgage faster?

Yes, but under narrow circumstances. Consider five points when deciding whether this strategy is for you:

  • Your cash flow. For the mortgage accelerator program to work, your monthly income must be more than you spend.
  • Your creditworthiness. The stronger your credit history, the better. A high credit score qualifies you for a strong HELOC rate, helping you save more on interest in the long run.
  • Your self-discipline. This strategy requires financial resolve that can be challenging. Funneling your paychecks into your mortgage may not leave room for extra spending.
  • Prepayment penalties. Ask your mortgage provider about prepaying charges, which reduces the amount you save, potentially undermining your efforts toward early payoff.
  • Home equity. The higher your home’s value, the lower your balance owed on your mortgage. How much you can borrow depends on your credit, income and the lender, but some lenders approve 75% of your equity or more.

How does this strategy work?

Using your HELOC to pay off your mortgage appears to comes down to two main methods.

Using a HELOC as a checking account

This method involves a cycle of maxing out and paying off your HELOC:

  1. Apply for HELOC approval.
  2. Max out the HELOC by applying it to your mortgage balance.
  3. Funnel your next paycheck into your HELOC’s balance.
  4. Use the newly available credit on your HELOC as you would a checking account — pay your bills, cover your expenses and make your regular mortgage payments
  5. Continue applying your paychecks to the HELOC until the balance on your line of credit is $0.
  6. Repeat steps 2 through 5 until your mortgage balance is $0.

Case study: Jennifer uses a HELOC as her checking account

Jennifer owes $240,000 on her mortgage after building $60,000 in home equity. She brings in $6,000 a month, and she’s set on paying off her mortgage ahead of schedule.

Jennifer takes out a $30,000 HELOC and applies it to her mortgage. She now owes $210,000 on her mortgage, with $60,000 in home equity and a $30,000 HELOC.

As her monthly paychecks come in, she applies the entire $6,000 to her HELOC. At the end of the first month, she’s paid down her HELOC balance to $24,000.

Jennifer uses the $6,000 she’s freed up in her HELOC as she would a checking account, paying bills and covering her regular mortgage payments.

Jennifer continues to pay down her HELOC with her monthly paychecks until the HELOC’s balance is back to $0. She repeats the process by maxing out the HELOC and applying another $30,000 to the mortgage until she’s fully paid off her home.

How much can I borrow?

It generally depends on your loan-to-value ratio — or LTV ratio. You can calculate this ratio by dividing your home loan value by your property value.

For example, if you put down $60,000 on the purchase of a home valued at $300,000, you’re left with a $240,000 mortgage and an LTV of 80%.

Lenders typically offer the most competitive rates to those with an LTV ratio of under 80%. An LTV ratio above 80% doesn’t necessarily disqualify you from HELOC approval, but you might face higher interest rates.

The amount of your HELOC also depends on how much equity you’ve built in your home. You can typically access 75% of your property’s value, with select lenders allowing up to 85% or more, minus what you owe on your mortgage.

Strategies that involve a HELOC to pay off your mortgage tend to work best if your property’s value is at least 15% more than what you currently owe.

How to calculate your loan-to-value ratio (LTV)

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What are the benefits of using a HELOC to pay off my mortgage?

The strategy is complex, but advantages to paying off your mortgage ahead of schedule include:

  • Interest savings. By paying off your mortgage early, you could potentially eliminate tens of thousands you pay on interest over the life of your loan.
  • Eliminate PMI. After you’ve build at least 20% equity in your home, you can bid farewell to pesky private mortgage insurance fees.

What are the risks?

This strategy is not for the financially faint-hearted. Before you considering using a HELOC to accelerate paying off your mortgage, consider drawbacks like:

  • High HELOC fees. Application fees, appraisal costs and transaction fees contribute to the overall expense of taking out a home equity line of credit — and can eat into your savings.
  • Variable HELOC rates. HELOC rates are often less competitive than those that come with mortgages, and they can rise over time with the market.
  • Restricted finances. This strategy requires funneling the bulk of your monthly income into your mortgage, leaving little financial wiggle room for home improvements, medical emergencies or other unexpected expenses.
  • Prepayment penalties. Paying off your mortgage early is less appealing if your lender charges fees for extra payments.
  • Long-term commitment. It could take years of limited financial freedom to see the fruits of your labors with this strategy.
  • You could lose your home. Your HELOC is secured by the property you’re borrowing against. If you can’t keep up with payments, you risk losing your most valuable asset.

Is using a HELOC to pay off my mortgage a good idea?

With healthy self-discipline under the right circumstances, a HELOC to pay off your mortgage ahead of schedule could save you money in the long run. But this strategy is only viable under a strict set of circumstances that include positive cash flow, income stability and considerable financial discipline.

That said, several other ways can help you pay off your mortgage. If you’ve built up enough equity in your home, you could take out a HELOC as a method of mortgage refinancing.

Or consider making extra principal payments out of pocket. This gives you complete control over the process and doesn’t restrict your finances in the event of an unforeseen expense or emergency.

What are the other ways I can use a HELOC?

Besides using one to pay down your mortgage, you can leverage a HELOC to:

  • Pay down a credit card. Credit cards are notorious for high rates. A more competitive HELOC rate could be a prudent way to manage your debt.
  • Renovate your home. Many homeowners use HELOCs to finance upgrades and add-ons that add to their home’s value.
  • Cover a big expense. With dedicated repayments, your HELOC can help you access equity for a dream vacation, a new car or other item on your wishlist.
  • Invest in property. If you’re interested in diversifying your real estate portfolio, Use a HELOC to invest in property and diversify your real estate portfolio.

Bottom line

Using a HELOC to pay off your mortgage ahead of schedule could help save you thousands of dollars in interest. But you need the self-discipline to stay on top of the complicated strategy of moving your money around without putting your finances or your home at risk.

Shop HELOC rates and terms to find the strongest product you’re eligible for to fit your long-term borrowing needs.

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