If you have a low mortgage balance, you may want to find a way to lower your payments or decrease the amount of interest you pay. It makes sense, especially if you’ve had the mortgage for a while. You are tired of paying interest and just want to pay your mortgage off as fast as you can. One option is with a HELOC or home equity line of credit.
A HELOC works a little differently than a traditional mortgage. They typically have lower interest rates and you can use the line of credit repeatedly during the draw period, much like a credit card. Below we discuss the pros and cons of using this method to pay off your mortgage.
Pros of Paying off a Mortgage With a HELOC
- Refinancing your mortgage with a HELOC is still just that – a refinance. You’ll still have minimum payments required and you’ll still pay interest on your balance, but it does have its advantages:
- You’ll pay a lower interest rate – HELOCs typically have much lower interest rates than traditional mortgages, which can save you money on the remaining portion of your mortgage
- You’ll have a lower payment – The lower interest rate means a lower monthly payment. In fact, for the first 10 years, you only have to pay interest, but if you want to pay your home off faster, you should pay money toward the principal
- You can fix a portion of the loan – If rates get to a point that you’d like to lock in the rate, you can freeze a portion of your HELOC, locking in that rate. You won’t be able to reuse the funds, but you won’t have to worry about rising interest rates
- The lower payment makes it easier to pay extra toward the loan – With lower required payments, you may be able to better afford extra principal payments, knocking even more time off your loan
Cons of Paying Your Mortgage Off With a HELOC
Like we said above, it’s still a refinance, which means qualifying for another loan and paying closing costs. Fortunately, HELOCs have fewer closing costs than a standard loan, but it’s still a downside. Other cons include:
- You’ll have a variable interest rate – Your interest rate can change every month. You won’t know how much you owe until you get your statement every month. This can make it hard to budget.
- You can reuse the funds – Even though it seems like a benefit, having access to a line of credit could put you further into debt. Rather than paying your mortgage off early, you may find yourself with payments for the next 15 years.
- It only pays off if you make extra payments – A standard HELOC has a 10-year draw period and then an additional 15- year term to pay off the principal (plus interest). If you don’t make extra payments, you’ll have a loan for the next 25 years, which could add a lot of time to your loan.
Think long and hard before paying off your mortgage with a HELOC. Make sure that you’ll save money in the long run and that you won’t use the HELOC to put yourself further into debt. If you can save on the interest and can afford larger payments, you do stand to save a significant amount of money on your loan for the remaining balance that you have.