Using A HELOC To Pay Off Your Mortgage
Most people who have a home mortgage are interested in paying it off as soon as possible. Which leads to the question, is it smart to use a Home Equity Line of Credit (HELOC) to pay off a mortgage?
The process of applying for a HELOC is fairly simple, as long as the you’ve got enough equity in your home and you’re in good standing with your lender, but just because it’s easy, does that make it a good idea?
Using a HELOC to pay off your mortgage can be a great idea; however, there are some important caveats to consider. First, using a HELOC to pay off your mortgage means you will need to retain a reliable positive cash flow (i.e., steady employment and income) to make the monthly payments.
And while a HELOC can save you money in interest payments versus paying a mortgage over the course of 15 or 30 years, it’s important to note that HELOCs have a variable interest rate, which means there may be months when your HELOC interest rate will be higher than what you were paying on your mortgage.
At Credit Union of Southern California (CU SoCal), we can help you understand if using a HELOC to pay off a mortgage is right for you.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our home equity lines of credit
, auto loans
, personal loans
and savings accounts
, and other banking products. As a full-service financial institution, we look forward to helping you with all of your banking needs.
Get Started on Your Home Equity Line of Credit (HELOC)
What Is A HELOC and How Does It Work?
A Home Equity Line of Credit (HELOC) is a type of “revolving” credit that is provided by a lender, has a credit limit, a variable interest rate, and is secured by the equity in a home.
A HEOC is a “secured loan,” meaning that the borrower’s home will be used to as collateral to secure the loan. Because the home is used as collateral, if monthly repayment isn’t made on time, or the loan is not repaid at all, the lender can foreclose and take possession of the home.
Some common uses for a HELOC include home renovations, buying a second home or investment rental property, paying for college tuition, and paying-off high interest debt.
Learn more by reading, What Is A HELOC
Calculating How Much HELOC You Can Get
The loan amount a lender offers a borrower will depend on several factors, including how much equity you have in your home, your credit score, the lender’s maximum loan limit, and a combination of other requirements that may be unique to each lender.
The great thing about HELOCs is that if you are approved for one, you will be able to use as much or as little of the total loan amount as you want and need at any given point, and you’ll only be responsible for paying interest in whatever amount you’ve choosen to actually borrow.
The HELOC amount you can get approved for will be based on the lender’s qualifying guidelines. Here are some general requirements, which will vary by lender:
- A minimum credit score of 660.
- Proof of income and employment.
- A new appraisal to determine the current value of your home.
- Up to 85% Loan-to-Value (LTV)
Learn more by reading, How Much HELOC Can I Get
How To Pay Off Your Mortgage With A HELOC
Using a HELOC to pay off a mortgage can work if you are able to borrow more than you currently owe on your mortgage.
How does a HELOC work to pay off mortgage?
For example, if you owe $350,000 on your mortgage, and have enough equity to borrow $200,000 in the form of a HELOC, then you can reduce the amount you owe on your mortgage to $150,000.
This wouldn’t eliminate the mortgage entirely, but you can ask your lender to recalculate interest payments based on the new mortgage loan amount, and save money while paying off the loan sooner.
If you can qualify for a HELOC that’s larger than the amount you owe on your mortgage, you can pay the mortgage off in full, and then pay off the HELOC at what could be a lower interest rate.
Pros Of Paying Off Mortgage With HELOC
Is it smart to use a HELOC to pay off a mortgage? Here are some pros and cons to consider in your decision making process.
Lower Interest Rate:
The Pros Include:
HELOCs can have a lower interest rate than the rate you’re currently paying on your mortgage, so using the HELOC to reduce your mortgage principal amount will save you money on interest over the long term.
You can use the funds in your HELOC for any purpose. In addition to paying off or paying down your mortgage, you can make home renovations that will increase the value of your home.
Interest May Be Tax Deductible:
According to the IRS
, interest paid on home equity loans and lines of credit is only deductible when you use the proceeds to buy, build, or substantially improve your home that secures the loan.
For example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not. Get more information from the IRS
The Cons Include:
Repaying a HELOC: HELOCS have a “Draw Period” (typically 10 years) and a “repayment period” (typically up to 20 years). During the draw period, you can borrow as much of the funds as you need. Payments made during the draw period are “interest only,” meaning you aren’t repaying the loan with principal.
When the repayment period starts, some people aren’t financially prepared to start paying off the amount they used. Repayment will include interest and principal, which will make the monthly payments higher than during the draw period.
Some lenders will allow payments toward principal during the draw period. And you may be allowed to roll the repayment amount to a fixed rate. Be sure you understand the HELOC repayment terms before accepting the loan.
Overspending: As with paying back any loan, responsible spending is critical, as you will be required to pay back what you borrow, in the form of monthly payments.
Many people end up spending the HELOC on things other than their original intention. If you get a HELOC to pay down or off your mortgage, don’t use the funds to purchase a boat, vacation or luxury items.
Your Home Is Used As Collateral: If you default on the loan, the lender can do a foreclosure and you could lose your home. Failure to make on-time payments will hurt your credit score.
Before Taking Out A HELOC
Here are some important things to consider before taking out a HELOC.
1) Know how much you still owe on your mortgage:
Looking at your monthly mortgage statement you can see how much principal you owe on the mortgage. This is the number that doesn’t include interest or escrow for insurance and property taxes.
2) How long it will take to pay off:
Based on your income, and how much you pay down each year, you can get a realistic idea of how long it will take you to pay off your mortgage. You may also take into consideration how long you plan to stay in your home and if you expect to be earning more in the future or less.
3) How long they plan on repaying the HELOC:
The repayment term of a HELOC can be up to 20 years. Compare this timeframe to your mortgage term, 15 or 30 years. Which works best for your income and budget?
4) Know some additional uses of HELOCs:
As we mentioned earlier, most people take out a HELOC for a specific purpose, such as paying off their mortgage. While the funds can be used to purchase anything, using the money to invest back into your home is always best.
Other Uses For A HELOC
A HELOC is cash in the bank to use however you choose. Here are some of the most advantageous ways to use a HELOC:
Pay Down Credit Card Debt: Many people use a HELOC to pay down high interest credit card debt because HELOCs come with a lower interest rate than credit cards.
Renovate Your Home: Making major home renovations, such as updating a kitchen or bathroom, replacing a roof or getting new windows can get costly. Major home updates can add value to your home, so using a HELOC to finance these updates can be a good investment.
Cover A Big Expense: Some large expenses can’t easily be covered by the money you have in the bank or by using a credit card. Consider a HELOC when you need to pay for college tuition, a wedding, or a costly car repair such as replacing the engine or transmission.
Invest In Property: Having a HELOC means you’ll have cash in the bank, available any time you need it. Some people will take advantage of this easy access to cash to purchase a second home or investment property. For example, you could make a cash offer and close a deal quickly, with no closing or closing costs involved.
CU SoCal HELOC
At CU SoCal, we make qualifying for a HELOC stress-free! We offer an interest-only HELOC, so you pay only the interest due each month, giving you the flexibility to keep payments low during the 10-year draw period of your loan. We offer the choice a lump-sum loan or a revolving credit line that can be used over and over again.
Other great HELOC features include:
- Access up to 80% of your home's equity.
- No points.
- No appraisal fees for single unit loans.
- No annual fee.
- No closing costs.
- Loan limit up to $250,000.
Why Savvy Consumers Choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Get Started on Your Home Equity Line of Credit (HELOC)