Should You Pay Off Your Home Early With a HELOC?

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While it may be possible to pay off your mortgage early with a HELOC, the proposed methods by some advisers carry significant financial risk. One of these methods is known as the mortgage accelerator method, which involves paying off your mortgage using a HELOC and then paying that off with your income.

But before you move forward with that idea, be sure to do your research. These programs, are both controversial and complicated.

“There’s no blanket rule that a mortgage accelerator plan can’t work or that’s it’s bad for everyone or good for everyone,” said Mark Charnet, a financial planner and president of American Prosperity Group in Pompton Plains, N.J. “You need to be heavily disciplined.”

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How do you pay off a mortgage with a HELOC?

The basic idea is to pay off your mortgage faster by shifting the balance to a HELOC either in full or incrementally. You save money on your interest payments by virtue of the different ways lenders calculate interest on each type of loan.

On a traditional mortgage, you’re paying interest on the whole balance and making the same payment the whole time you have that loan, Charnet said. With a HELOC, you’re paying interest on a declining balance, so it’s a much faster payoff, he said.

If the HELOC has a lower interest rate, the calculations are fairly simple. You could save money by replacing your mortgage with the lower-interest home equity line of credit. Even if the rates are similar, you still may be able to pay the balance in full faster and with lower overall interest because the interest payments are calculated on your monthly balance rather than the initial loan amount.

However, Charnet points out, it’s unusual for people to have enough equity in their home to take out a large enough HELOC to pay off their first mortgage. Most banks lend a maximum of 80% of your home value, he said.

The mortgage accelerator program

A more complex mortgage accelerator strategy is to leverage your entire paycheck to pay your mortgage one month and use a credit card for living expenses. In alternating months, you’ll pay larger amounts to your mortgage, credit card and HELOC.

These programs are more common in Australia and the U.K., where the plans combine a checking account and a home equity loan. In the U.S., some companies offer software to automate the loan payoff process and other advisers outline a DIY approach.

To successfully pay off your mortgage this way, you need to meet several conditions:

  • You need positive cash flow. The bigger the difference between your paycheck and your living expenses, the faster you’ll pay off your loan.
  • Your income must be consistent. If you have cash flow issues from inconsistent income, you could end up with increasing balances rather than declining balances or be unable to pay your debt as planned.
  • You need a credit card — or more than one — with available credit to charge all of your living expenses for one month or more.
  • You need a HELOC, preferably with a debit card, so you can avoid using your credit card.

Is it worth it to pay your mortgage with a HELOC?

Paying off your mortgage with the mortgage accelerator method may be difficult for most Americans, particularly because it’s most effective if you have exceptionally good cash flow and discipline. In addition, you’re transferring debt to a HELOC, which typically has a variable interest rate.

“The main drawback to a HELOC is that you can’t lock your rate,” Charnet said. “You run the risk of the rate floating up, which could increase the amount of interest you pay.”

The mortgage accelerator program works best for homeowners with significantly more income than expenses, savings for an emergency and a low mortgage balance compared with the value of their home. In addition, it’s best for people who plan to stay in their home for the long term, Charnet said.

“Maybe if you have a wide margin in the interest rate between the mortgage rate and the HELOC, such as a 7% mortgage rate and a 3.5% HELOC, then you could consider shifting the debt to the HELOC,” said Charnet. “But if the rates are close and the HELOC rate is floating, I wouldn’t do it unless you could pay off everything in five years or less.”

Borrowing too much of your home equity can be dangerous, said Charnet.

“If you use up your credit line to pay off your mortgage and then need $20,000 to fix your roof, you won’t be able to use your HELOC to pay for it,” he said. “You’ll have to pay down the HELOC before you can borrow against it again.”

Since a HELOC is a line of credit tied to the value of your home, it can be frozen by the lender even if you make your payments if home values decline.

Charnet also warns against using a credit card to pay living expenses. If you lose your job or have another issue that impacts your income, you could end up with two mortgage balances and credit card debt.

“The number one goal for everyone should be to get out of bad debt,” said Charnet. “A mortgage at 4.25% isn’t bad debt because it’s backed by real estate. Credit card debt is bad debt.”

Other ways to pay off your mortgage early

If you want to pay off your mortgage faster, there are simpler ways to accomplish your goal.

Make additional payments to the principal

The safest way to accelerate your loan payoff is to make biweekly payments or to add one extra payment per year, said Chanet. You can make extra payments at any time and designate them toward principal reduction. The benefit of this is that you can adjust your extra payments based on your finances.

Create a special mortgage payoff savings plan

You can calculate how much to save each month and accumulate enough to pay off your loan in full by a specific date. Saving in a separate account has the advantage of not taking on extra debt in the form of a HELOC and gives you added security in case circumstances change and you need the money for another purpose.

Recast your mortgage

If you have a lump sum of savings to devote toward reducing your mortgage balance, you can ask your lender to recast your loan. A loan recast revises your monthly payment based on the new balance but keeps the interest rate and loan term the same. If your goal is to repay your loan faster, you can continue making larger payments after the loan is recast to reduce the principal faster. But since the mandatory payments are lower, you have flexibility in case your finances are tight at some point. Recasting generally has lower costs than refinancing.

Refinance into a lower rate or shorter-term loan

Refinancing into a shorter term loan could result in higher monthly payments but also offers the advantage of an earlier payoff date. Depending on your current loan balance and rate, your payments could be the same or lower. A refinance requires closing costs, but it offers the certainty that a mortgage accelerator program lacks.

While paying off your first mortgage with a HELOC may sound compelling, there are safer and simpler ways to move up the date of your mortgage burning party.

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