Using a HELOC to pay off a mortgage is an interesting debate.
What’s a HELOC?
A HELOC is a home equity line of credit. If you have equity in your home, you can take out a loan from your bank using that equity as collateral.
Paying off a mortgage with a HELOC is paying off a loan with another loan.
While I’m not so sure paying off a mortgage is the smartest financial move anymore (I used to believe it was), doing it using another loan certainly an idea worth exploring.
I’m going to summarize the issues in a
fair and balanced slightly biased way.
So Should I?
My final answer on this is that you should not use a HELOC to pay off a mortgage. HELOCs are variable rate loans instead of fixed rate like a (good) mortgage. HELOC interest is not tax-deductible in most cases. The line of credit can be frozen or reduced by the bank at any time. Also, even if you are making lower, interest only payments on your HELOC, it eventually will revert to a principal plus interest payment that you may not be ready for.
Of course, there is always the debate of should you payoff a mortgage at all.
Pay off Mortgage with a HELOC – How it’s done
One of the main ways to pay off a mortgage with a HELOC is confusing to someone with as simple a mind as mine.
I will attempt to explain the basics.
- Each month you use your entire paycheck and apply it towards the mortgage.
- Then, you use a good credit card (hopefully with points) to handle most of your living expenses throughout the month. This buys you roughly 45 days of interest-free money.
- You then use the HELOC at the credit card’s due date to pay it off, and use the same HELOC to make the minimum mortgage payment each months.
- Next month, you repeat the same process with your whole paycheck.