How to Pay Off Your Mortgage With a HELOC

A Home Equity Line of Credit (HELOC) allows homeowners to tap into their home’s equity, providing a revolving line of credit secured by the property. Like a credit card, a HELOC lets you borrow funds as needed, up to a set maximum limit, and you only repay the amount used. This flexibility makes a HELOC an appealing option for managing significant expenses, including restructuring or paying down an existing mortgage.

HELOC Fundamentals for Mortgage Integration

A Home Equity Line of Credit operates as a revolving credit facility, allowing access to funds up to an approved limit. Unlike a home equity loan, which provides a lump sum, a HELOC’s available credit replenishes as the borrowed amount is repaid. Funds can be accessed through online transfers, checks, or linked debit cards, depending on the lender.

HELOC interest rates are variable, meaning they can change over time. This rate combines an index rate, often the U.S. Prime Rate, with a fixed margin added by the lender. For example, if the Prime Rate is 8.50% and the margin is 2%, the HELOC interest rate would be 10.50%. This variable nature means monthly payments can fluctuate, potentially increasing if the index rate rises.

HELOCs have two main phases: the draw period and the repayment period. The draw period, typically lasting 10 years, is when funds can be accessed. During this phase, borrowers usually make interest-only payments on the amount borrowed, offering lower initial monthly obligations.

Once the draw period concludes, the repayment period begins, typically lasting 10 to 20 years. During this phase, borrowers can no longer draw new funds. Monthly payments then include both principal and interest, which can lead to significant increases in payment amounts.

HELOC Application and Approval Process

Lenders assess several factors to determine HELOC eligibility and credit limits. These include the amount of equity built in the home, the applicant’s credit score, and their debt-to-income (DTI) ratio. Homeowners typically need at least 15% to 20% equity in their property to qualify.

Applicants need to provide a range of documents to verify their identity, income, and property details. Personal information such as a Social Security number, birthdate, and current address is required. Income verification commonly includes pay stubs for the last 30 days, W-2 forms for the previous two years, and potentially tax returns, especially for self-employed individuals. Lenders also request information on current debts and account balances, along with the most recent mortgage statement and proof of homeowner’s insurance.

After submitting the application and required documentation, the lender initiates an underwriting review. During underwriting, the lender assesses creditworthiness, verifies income, and evaluates the property’s value. A home appraisal is a standard requirement for a HELOC.

The approval process, from application submission to closing, can range from a few days to several weeks, averaging around 30 days. Once approved, closing involves signing loan documents, often in front of a notary. Following closing, a federal right of rescission period, typically three business days, allows borrowers to cancel the loan without penalty. Funds usually become available after this rescission period ends.

Executing Mortgage Payments with a HELOC

Once a HELOC is approved and funds are available, the primary method for using it to pay down a mortgage is to draw funds and apply them directly to the mortgage principal. This strategy is typically considered when the HELOC’s interest rate is lower than the existing mortgage rate, potentially leading to interest savings.

Borrowers can typically transfer funds directly from their HELOC to a linked checking or savings account through online banking platforms or mobile apps. Some lenders also provide physical checks or a dedicated debit card tied to the HELOC. After drawing the desired amount, these funds are then used to make a payment to the mortgage servicer.

When making a mortgage payment with HELOC funds, it is important to specify that the payment should be applied to the principal balance of the mortgage. This accelerates the payoff of the original mortgage. For example, a homeowner might draw a substantial sum from the HELOC to make a large lump-sum principal payment on their mortgage, potentially eliminating the mortgage entirely or significantly reducing its balance. This action shifts the debt from the mortgage to the HELOC.

Managing the combined debt then becomes a matter of diligently paying down the HELOC balance. While the original mortgage payments may cease or decrease significantly, the HELOC now carries the outstanding debt, subject to its variable interest rate and repayment terms. Borrowers will receive monthly statements for the HELOC, outlining the minimum payment due, which, during the draw period, may be interest-only. Regularly tracking interest accrual on the HELOC and understanding the transition from the interest-only draw period to the principal and interest repayment period is crucial for effective debt management. The interest paid on a HELOC may be tax-deductible if the funds are used to buy, build, or substantially improve the home securing the loan, though this specific tax benefit should be confirmed with a tax advisor.