Can you use a HELOC to pay off your mortgage? Let’s get to the bottom of it. A home equity line of credit, more commonly known as a HELOC, works a bit like a credit card. You get approved to borrow a certain amount and you can draw from that amount throughout a pre-determined draw period, usually about 10 to 15 years.
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In Short:
Using a HELOC to pay off a mortgage is simple. Assuming you can get approval and have enough in equity, your HELOC funds will pay off the balance of your existing mortgage.
The process is best suited for a homeowner who:
- Has more equity than debt in a property
- Can get a lower rate on a HELOC than they have on their mortgage,
- Or has enough equity to also make some improvements on the home.
The advantage of a HELOC is that you can often borrow much more than you could with a credit card, and you can do so at a lower interest rate.
While a HELOC can offer tax benefits(1), there are limitations. You should consult your tax professional to learn more. These possible tax advantages are why many homeowners choose a HELOC, not only to pay off a mortgage, but also to make home improvements.
How to Use Your HELOC to Pay Off Your Mortgage
If you’re planning on using a HELOC to pay off your mortgage, you first need to make sure that the amount you have available to borrow is equal to or greater than what you owe.
HELOC lenders will usually lend up to 90 percent of your home’s value, minus the amount that you owe on your mortgage. For example, if you have a $250,000 loan with a $100,000 balance, 90 percent of your home’s value would be $200,000. Subtract the balance on your mortgage and you have $100,000 available to borrow.
In this situation, you’d take the full $100,000 as soon as you were approved and send that money to your mortgage lender. You might choose to start repaying interest plus principal on your HELOC, or if your lender offers it, you may be able to make interest-only payments until the loan enters its repayment period.
Pros of Using a HELOC to Pay Off Your Mortgage
If you qualify for a good interest rate and choose the right option for your needs, using your HELOC to pay off a mortgage can be a savvy financial decision.
1. You can end up paying less
The longer you carry a mortgage balance, the more interest you accrue. You still pay interest on a HELOC, of course, but you could score a significantly lower interest rate, especially if you took out a fixed-rate mortgage when market rates were higher.
If that happens, then you’ll accrue less interest with the HELOC than you would with your original mortgage. Less interest accrued means a lower overall cost of the property.
2. You can do other things with the money, too
If you have more available to borrow than you’d need to pay off your mortgage, you can choose not to borrow the remaining amount, or you could do something else with it.
Remember, you may be able to deduct HELOC interest from your taxes if you use the money to buy or improve your home. You should consult your tax professional to determine whether HELOC interest is tax deductible.
How great would it be to pay off your mortgage and update your kitchen and bathroom? If your renovation increases the value of your home, you’ll build your equity faster than if you were just paying off the loan.
Cons of Using a HELOC to Pay Off Your Mortgage
No loan product is perfect for everyone or every situation. Consider these factors before you commit to a HELOC.
1. You still have to pay off the same principal amount
If you borrow $100,000 against your equity using a HELOC and use it to pay off your mortgage, you’ll still have to pay off your HELOC.
2. You could lose your home if you default.
Your home serves as collateral on a HELOC or a home equity loan. If you fall behind on payments, your lender can foreclose, just as your original mortgage lender could.
Interested? Learn more about the process of taking out a HELOC and determine whether it’s the right choice for your home and your finances.
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(1) Prosper does not provide tax advice. Please consult a tax advisor regarding the potential deductibility of interest and charges.
Eligibility for a home equity loan or HELOC up to the maximum amount shown depends on the information provided in the home equity application. Depending on the lender, loans above $250,000 may require an in-home appraisal and title insurance. Depending on the lender, HELOC borrowers must take an initial draw of the greater of $50,000 or 50% of the total line amount at closing, except in Texas, where the minimum initial draw at closing is $60,000; subsequent HELOC draws are prohibited during the first 90 days following closing; after the first 90 days following closing, subsequent HELOC draws must be $1,000, or more, except in Texas, where the minimum subsequent draw amount is $4,000.
The amount of time it takes to get funds varies. It is measured from the time the lender receives all documents requested from the applicant and depends on the time it takes to verify information provided in the application. The time period calculation to get funds is based on the first 4 months of 2023 loan fundings, assumes the funds are wired, excludes weekends, and excludes the government-mandated disclosure waiting period.
For Texas home equity products through Prosper, funds cannot be used to pay (in part or in full) non-homestead debt at account opening.
Depending on the lender, qualified home equity applicants may borrow up to 80% – 95% of their primary home’s value and up to 80% – 90% of the value of a second home. In Texas, qualified applicants may borrow up to 80% of their home’s value. HELoan applicants may borrow up to 85% of the value of an investment property (not available for HELOCs).
Home equity products through Prosper may not be available in all states.
All home equity products are underwritten and issued by Prosper’s Lending Partners. Please see your agreement for details.
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