Should you use a HELOC to pay off mortgage debt?

Many homeowners wonder whether using their home equity to help pay down an existing mortgage is a smart financial move. In some cases, it can be but it's not always the most cost-effective or lowest-risk option. A home equity line of credit (HELOC), which is a type of mortgage secured by your home, can be used for a variety of purposes, including managing cash flow, funding renovations, or consolidating higher-interest debt. However, using a HELOC to pay off a mortgage requires careful consideration.

While traditional mortgages and HELOCs are both secured by your home and involve a lien, they are structured differently and often serve different financial needs. A mortgage typically provides long-term, predictable payments used to purchase or refinance a home, while a HELOC offers revolving access to home equity with more flexibility but often variable rates. Because a HELOC is still a mortgage obligation, it isn't the right solution for every situation. Before moving forward, it's important to understand the risks, costs, and trade-offs involved.

How does paying off your mortgage with a HELOC work?

A HELOC's revolving line of credit differs from other financing options, such as home equity loans or unsecured personal loans, primarily in how funds are accessed and repaid. With a HELOC, borrowers can draw from an approved credit line as needed during the draw period, rather than receiving a lump sum upfront. During this time, payments are often interest-only on the amount borrowed. After the draw period ends, the loan enters the repayment period, during which both principal and interest are due.

This flexibility can be helpful when managing larger expenses, such as home renovations, education costs, or other financial needs over time. In some situations, if a HELOC's variable interest rate is lower than the fixed rate on an existing mortgage, borrowers may be able to reduce interest costs or accelerate mortgage payoff. However, because a HELOC is a form of mortgage secured by the home and typically carries a variable rate, it may not be the best option for everyone. Carefully weighing the potential benefits, risks, and long-term costs is an important step before using a HELOC to pay off a mortgage.

Benefits of using a HELOC to pay off a mortgage

Every homeowner's financial situation is different, but for those with a significant amount of equity, using a HELOC to help pay down a fixed‑rate mortgage may be an option worth considering. Some potential benefits of using a HELOC in this way include:

• The potential to access a lower interest rate compared to an existing fixed‑rate mortgage
• Reduced monthly payments during the HELOC’s draw period, when payments are often interest‑only
• Flexible access to remaining available credit after the mortgage balance is satisfied
• Avoiding some of the traditional costs associated with refinancing a mortgage loan

Potential HELOC risks and drawbacks

When weighing your financing options, it's also a good idea to consider the potential cons of using a HELOC to pay down a mortgage, which may include:

• Variable interest rates can increase, potentially resulting in higher monthly payments.
• You may lose mortgage tax benefits if you're currently itemizing deductions and paying interest on your traditional mortgage loan.
• HELOCs require you to utilize your home as collateral, meaning that if you can’t make your payments, you risk losing your home.
• Closing costs and fees may apply with some lenders, which could outweigh the cost benefits of using a HELOC to pay off mortgage debt. However, a Citizens HELOC does not have closing costs or application fees, which may help reduce upfront costs.
• Payments typically increase during the repayment period, so you must budget accordingly.
• Available credit could tempt you to spend more than you planned.
• If you sell your home, your HELOC balance must be paid off at the closing.

Alternative uses for a HELOC

There are typically no restrictions on what you can do with your HELOC funds, which gives you a great deal of flexibility. A HELOC might be a better choice for some of these uses:

• Home improvements that increase property value
• Debt consolidation for higher-interest loans
• Emergency fund flexibility
• Large purchases
• Educational expenses
• Cash flow management

Using a HELOC to pay off your mortgage: What to consider

Before you commit to a HELOC to pay off mortgage debt, you'll want to weigh the costs, benefits and timing of each available option. If you're able to secure a lower interest rate, you may want to convert some of the monthly savings into principal payments and pay off your home faster.

A thorough understanding of what you're hoping to accomplish — lower monthly payments, added flexibility or paying off mortgage debt completely — can help you formulate the best strategy to meet your financial goals.

With a HELOC, you can leverage existing home equity in return for access to a line of credit with variable interest rates that may not be available elsewhere. However, with a HELOC, you will also need to manage interest rate shifts and changing payment amounts as you transition from the draw period into the repayment period.

Get your HELOC rate today

When you're ready to move forward with a HELOC, start the process by reviewing your personalized offer, including the most current rates available from Citizens.

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