5 Steps to Pay Off Your Mortgage Early With a HELOC

Updated May 22, 2023

Are you one of the many people today who are investment property-rich, but cash-challenged? If you have a home equity investment but are still paying off your mortgage, you may be thinking about using a HELOC to pay off mortgage bills. This might be to finance the purchase of your next home, for example, or to pay down your mortgage debt using a home equity loan.  

As mortgage debt is the largest debt that most people will ever have, many people use a HELOC to pay off their mortgage, despite it being a complicated strategy. When weighing out the pros and cons of paying off your mortgage early, getting a HELOC sounds more and more appealing.  

What Is a HELOC?  

A home equity line of credit, commonly referred to as a HELOC, is a type of second mortgage that allows homeowners to borrow against their home equity and save thousands on compound interest over the life of the loan term. When applied to your mortgage, the goal is to optimize your home equity to refinance higher-interest mortgage debt. A HELOC may also be useful for those considering options like a cash out refinance or exploring home equity loans as an option to manage credit card debt.

It is important to note that it is possible to lower mortgage payment without refinancing. You use your home’s equity as collateral, automatically shifting your debt from the mortgage into a HELOC loan at a lower interest rate. A HELOC lender will usually lend up to 80 percent of your home’s value, minus the amount that you owe on your mortgage loan.A home equity line of credit or HELOC is similar to a credit card in that it has a credit limit, based on your home’s equity. It has the advantage of reducing the monthly mortgage payment and interest payment which helps pay off your mortgage faster. What you will be doing is taking money from the HELOC (simple interest) to pay off your mortgage (amortized mortgage interest). The point is to pay down your principal faster, saving significant money on interest payments over the repayment period of the loan. Learn more about how to use home equity to your advantage, and its role in different types of real estate transactions.

How to Pay Off Your Mortgage With a HELOC in 5 Steps

When using a HELOC to pay off a mortgage, HELOC borrowers move their expenses between a HELOC and a credit card so that they can use their existing income to pay down their home loan principal.

1. Evaluate Your Financial Situation

The first step to pay off your mortgage early with a HELOC is to take stock of your current mortgage balances and overall financial situation to ensure a HELOC is the right choice for you. And as you navigate the landscape, be mindful of potential closing costs or any additional expenses related to borrowing. Make sure to ask and answer the following questions:

• Is your credit score the required 620 or higher?  (If not, no worries! Learn how to get a heloc with bad credit)
• How much home equity do you have?
• Does your monthly cash flow exceed your expenses?
• How much positive cash flow do you have? 
• How much extra can you spend to retain a positive cash flow?
• Do you have other financial priorities, such as an extra payment for your children’s college tuition or student loan?

To calculate your monthly positive cash flow, total all your monthly expenses and subtract them from your monthly income. What is left in your remaining balance in your checking account will be your positive monthly cash flow. The greater that amount, the faster you can pay off your home loan balance.  You can also use a HELOC calculator to figure this out. 

2. Develop a Cash Flow Plan

After calculating your positive monthly cash flow, you will be able to calculate the frequency and amount of payments you can make, from quarterly to annual, based on the need to retain your cash flow. This will help you figure out you can pay off your mortgage early with a HELOC.

3. Get a Credit Card

Make sure to get a credit card that will be good for paying bills – in other words, one that will give you a 45-day grace period for your monthly payment.

4. Apply for a HELOC

Now’s the time to apply for the HELOC itself. Plan to use the HELOC to make your mortgage payments and pay off your credit card balance each month. 

Tip: Having a debit card attached to your HELOC will make it easier to make payments.

5. Use Your HELOC to Make Your Monthly Payments

Each month you are going to use your HELOC to pay off your credit card bill and monthly mortgage payment.

Let’s say you put your full paycheck of $5,000 into your $200,000 mortgage, leaving a mortgage balance of $195,000. Meanwhile, all of your monthly payments and expenses ($2000) are going on a credit card, to be paid in full each month. This means you will have a total of $3000/month payments to your mortgage and credit card companies coming from your lower HELOC variable interest rate.

Repeat until you pay off your personal loan. While there are other variations on the strategy involving different degrees of financial sacrifice and discipline, it doesn’t have to be any more complicated than that.

Now that you know how to pay off your mortgage with a HELOC, will it work for you?

Pros of Using a HELOC to Pay off Mortgage

Using HELOC to pay off mortgage presents several benefits such as:

• You typically will pay less because you can often get a much lower interest rate on your HELOC’s variable rate unlike a fixed interest rate
• You might have extra money to use elsewhere if you have more than what’s needed to pay off your mortgage loan

Downsides of Using a HELOC to Pay off Mortgage

While it may seem attractive, there are downsides to using a HELOC to pay your mortgage early. The most notable are:

• HELOCs come with a variable interest rate 
• Paying off your mortgage with a HELOC can take a long time
• It can take a lot of discipline
• Paying off your HELOC will take time

Looking For HELOC Alternatives?

If your application results came back and you got a denied heloc, no need to worry. There are new alternative solutions that convert your home’s equity to cash. You get to pay off your mortgage early without a HELOC or other loan.

Sale-Leasebacks

A residential sale-leaseback solution allows homeowners to sell their home, accessing the money they need, while remaining in their home as a renter until they’re ready to move or repurchase the home. Solutions are tailored to each customer’s circumstances and can work with all different types of goals. The customer gets to pay off their mortgage early without a HELOC.

There are many benefits of a sale-leaseback, and a sale-leaseback is a good option for people who:

• Are in danger of losing their home and can’t get a credit line from a bank
• Can’t pay their primary mortgage or have defaulted on their mortgage
• Are independent business owners or freelancers
• Do not have a documented income history 
• Are divorced

It can also be suitable for those looking to move by eliminating the stress of the typical home selling and buying process by letting homeowners use their converted equity to buy a new home.

Some sale-leaseback solutions do not have any credit score, debt-to-income ratio, or W2 requirement, suitable for:

• People who want to sell their existing home to finance the purchase of their next home
• People selling single-family homes, condos, and apartments
• Individuals and small business
• People who are renovating their current home before selling
• People buying a fixer-upper

Key Takeaways

If you’re looking to pay off your existing mortgage with a HELOC, it’s important to know how it works and the pros and cons of doing so. Talk to a financial consultant to learn more about specific financial services in relation to using heloc to pay off mortgage, and find out if an alternative solution like a sale-leaseback may be a better solution for you. For more HELOC tips and insights into second mortgage considerations and alternatives, check out the rest of our blog.