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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.
Yes, but under narrow circumstances. Consider five points when deciding whether this strategy is for you:
Using your HELOC to pay off your mortgage appears to comes down to two main methods.
This method involves a cycle of maxing out and paying off your HELOC:
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.
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.
The strategy is complex, but advantages to paying off your mortgage ahead of schedule include:
This strategy is not for the financially faint-hearted. Before you considering using a HELOC to accelerate paying off your mortgage, consider drawbacks like:
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.
Besides using one to pay down your mortgage, you can leverage a HELOC to:
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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