If you have built up equity in your home but still have a mortgage balance to pay off, you may consider using a HELOC, or home equity line of credit, to reduce interest debt. Since home equity lines of credit can sometimes have lower interest rates than mortgage payments, you could save money and maybe even pay off your mortgage sooner. Even if the rates are similar, restructuring your payment plan with a HELOC may just work better for you. Weigh the pros and cons of using a HELOC to pay off your mortgage as opposed to a traditional refinance.
A HELOC borrows off your home equity. You can pay back the credit used and continue to access it as you would a credit card. You can use a HELOC for just about anything you want, including paying off all or part of your remaining mortgage balance. Once you get approved for a home equity line of credit, you could pay off your mortgage and then make payments to your HELOC rather than your mortgage. Note that HELOC rates are variable, which means they fluctuate with the economy and could go up in the future.
Using a home equity line of credit to pay off your mortgage is essentially a form of refinancing. It allows you to reduce your interest rate but doesn't have the closing costs associated with a home refinance. Before you decide on a HELOC to pay off your mortgage, there are several things to consider:
One of the benefits of a home equity line of credit is that you are only required to make interest payments during the initial draw period, usually 10 years. However, at the end of the draw period, the interest and principal will be rolled into one amortized monthly payment for a loan term of 15 years. You have to be prepared for this, or the increase in your monthly payment (which will now include principal as well as interest) will catch you by surprise and could hurt your finances.
You could also make payments toward the principal each month if you'd rather to space these out than have the large payment at the end. Since these are not automatically included in your monthly bills, you will need to specify how much you want to apply to the principal. Look into your loan agreement to find out if there are any prepayment penalties you need to be aware of. Generally, small monthly payments will not affect these penalties, but you'll want to be sure.
Another risk is the variable rate associated with the loan. If you still have a substantial balance left on your mortgage and it will take you several years to pay back the HELOC, you need to be aware that interest rates may go up in that time. One way to reduce this risk is to apply for a Capped Rate HELOC. Capped Rate HELOCs ensure the interest on your line of credit won't exceed a certain percentage point during the term of your loan. Alternatively, if you have a smaller mortgage balance and could pay off the loan in just a few years, the home equity line of credit could provide better rates and the variable interest will be less of an issue.
Discuss your current borrowing situation with a trusted lender like Citizens Bank to decide if using a HELOC to pay off your mortgage balance is right for you. Our Home Loan Originators are available to answer questions or help you assess what your payments would be like under a home equity line of credit. Consider applying for a HELOC as a refinance option that avoids closing costs and could reduce your payments.