If you have built up equity in your home but still have a mortgage balance to pay off, you may consider using a home equity line of credit (HELOC) to reduce your monthly payments and the overall interest you pay on your loan. Since HELOCs sometimes have lower interest rates than mortgages, you could save money and potentially pay off your mortgage sooner. Even if the rates are similar, refinancing your first mortgage with a HELOC might still be the best choice for you.
Here are some pros and cons of using a HELOC to pay off your mortgage as opposed to a traditional refinance.
Home equity loans and home equity lines of credit (HELOCs) allow homeowners to tap into their home’s equity to access cash for major expenses or consolidate high-interest debt While these products provide affordable financing, it’s wise to pay off the balance as fast as possible to minimize interest charges and eliminate the lien on your property
Fortunately, there are several proven methods to pay off a home equity loan or HELOC ahead of schedule This guide will explore the most effective strategies to become debt-free faster.
Why Pay Off Your Home Equity Loan Early?
Here are some of the biggest benefits of repaying your home equity loan or HELOC quickly:
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Save money on interest. Home equity loans and HELOCs carry lower rates than credit cards and personal loans. However, the interest still adds up over the long run. Paying off the balance faster reduces your total interest costs.
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Eliminate debt faster. The quicker you repay the loan, the faster you can remove this liability from your net worth statement.
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Remove lien from home. The lender places a lien on your property when you take out a home equity loan or HELOC. You must satisfy the lien before selling or refinancing the home.
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Improve credit score. As you pay down the loan, your credit utilization ratio decreases. This can boost your credit score, helping you qualify for better loan terms in the future.
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Free up cash flow. With the home equity payment gone, you’ll have extra money each month to save, invest or put toward other financial goals.
Ways to Pay Off a Home Equity Loan or HELOC
If you want to pay off your home equity loan or HELOC faster, consider implementing one or more of these strategies:
1. Make Extra Payments
One of the simplest ways to pay off a home equity loan early is sending extra principal payments whenever possible. For example:
- Add an extra $100 or more to your monthly payments.
- Make an extra lump-sum payment after receiving a tax refund or bonus.
- Pay half the monthly amount every two weeks to make an extra monthly payment each year.
When making additional payments, be sure to specify that the extra funds should go toward the principal balance, not future interest payments.
Pro tip: Biweekly payments let you make 26 half-payments per year, equaling 13 full monthly payments. This simple approach provides an extra monthly payment each year to accelerate your payoff date.
2. Refinance Your Home Equity Loan
If you qualify for a lower home equity loan rate, refinancing can help you repay the balance faster by reducing your interest costs. Closing costs may apply, but you can likely recoup those fees through interest savings if you plan to keep the loan more than a few years.
Aim for at least a 1% lower rate to make refinancing worthwhile. Compare home equity loan offers from multiple lenders to find the best terms.
3. Refinance Into a Shorter-Term Loan
Along with securing a lower interest rate, consider refinancing into a shorter loan term such as 10 or 15 years. This will increase your monthly payment, but you’ll repay the balance much quicker.
For example, refinancing a $50,000 home equity loan from a 20-year term to a 15-year term can allow you to pay off the loan 5 years early.
4. Use Your Tax Refund
If you receive a federal or state tax refund, consider putting those funds toward your home equity loan principal. Most households get a sizable refund every spring, giving you a great opportunity to make a one-time extra payment.
You may want to adjust your withholdings to get a smaller refund during the year. That way, you have extra money in each paycheck to put toward additional principal payments.
5. Apply a Windfall
In addition to tax refunds, take advantage of any other financial windfalls that come your way. For instance, you could use:
- An inheritance
- Cash gifts
- Bonus from work
- Money from selling assets like a car, valuable collectibles or investments
Putting a financial windfall toward your home equity loan is a strategic way to make progress. Even a few thousand dollars can knock off several months of payments.
6. Increase Your Income
Bringing in more money enables you to pay extra each month without compromising your current budget. Ways to increase income include:
- Asking for a raise at work
- Taking on a side hustle or part-time job
- Starting a small business on the side
- Having a working spouse or partner contribute more
- Renting out a spare room
Focus on generating at least an extra few hundred dollars per month that you can apply specifically toward quickly repaying your home equity loan.
7. Reduce Discretionary Spending
Cutting back on flexible spending is an alternative if you can’t increase your income. Make a list of discretionary expenses you can temporarily live without, such as:
- Dining out
- Entertainment and leisure
- Clothing and accessories
- Club memberships
- Costly hobbies
Trimming discretionary spending by $200 to $500 each month will free up cash to accelerate your home equity loan payoff.
8. Consolidate Other Debts
If you used a home equity loan or HELOC for debt consolidation, focus on paying off the balance you rolled in first before tackling the home equity debt.
For example, if you consolidated $20,000 in credit card balances but still owe $15,000 on those cards, pay off the credit card debt then put those monthly payments toward the home equity loan. This “debt stacking” approach lets you pay off the highest-interest debt first.
Paying Off a HELOC Fast
HELOCs have unique features that enable different early repayment tactics. Here are tips tailored to paying off a HELOC quickly:
Only Pay Interest at First
Most HELOCs offer an interest-only draw period for the first 5 to 10 years. Consider making the minimum payments during this period to allocate more funds toward high-interest credit card or personal loan balances.
Once the 0% APR promotional periods end on those debts, shift focus to aggressively paying down the HELOC principal before the repayment period begins.
Pay Principal During the Draw Period
If you don’t have higher-cost balances to focus on first, begin making extra principal payments during the draw period to get a head start on paying off the HELOC.
Even paying an extra $100 per month can make a significant dent during the interest-only period when all your regular payments only cover the interest.
Refinance Your HELOC
If your HELOC has an adjustable rate, watch for interest rate hikes that increase your monthly payment. Refinancing into a fixed-rate HELOC protects you from future increases.
You may also look at refinancing into a shorter repayment period to pay off the balance quicker. Or refinance your HELOC into a home equity loan with predictable fixed payments.
End the Draw Period Early
You can request to end the interest-only draw period early and switch into the repayment phase if you’ve finished using the HELOC funds. Beginning principal payments sooner shortens the payoff timeline.
Just be certain you don’t need to make any additional withdrawals. Ending the draw period early is irreversible with most lenders.
Halt Additional HELOC Withdrawals
Stop taking new withdrawals from your HELOC, even if you’re still in the draw period. This prevents growing your outstanding balance.
Stick to your initial HELOC amount and repayment plan. Additional borrowing now will only push back your payoff date.
Weigh the Pros and Cons
Before focusing all your efforts on accelerated repayment, weigh the pros and cons:
Pros
- Pay off your home equity loan or HELOC faster
- Reduce total interest paid
- Eliminate debt sooner
- Remove lien from property faster
Cons
- Less money for other goals
- Potentially higher monthly payments
- More effort required to increase income
If the benefits outweigh the cons, creating a payoff plan can help you stay motivated and committed to becoming debt-free ASAP.
Create a Payoff Plan
To ensure you take a strategic approach, develop a written payoff plan that may include:
- Extra payment amounts and dates
- Ways to increase income and trim expenses
- Timeline for debt consolidation
- Plans for any windfalls or cash infusions
- Target payoff date
Update your plan regularly to adjust for any changes in income, expenses, interest rates or access to extra funds.
Automate payments and transfers whenever possible to keep the payoff momentum going. Stay disciplined in limiting unnecessary spending that could undermine your accelerated repayment efforts.
Is Paying Off a HELOC or Home Equity Loan Early Right for You?
Paying off a home equity loan or HELOC faster than required may not make sense in every situation.
You may decide to prioritize other financial goals first, like:
- Saving for retirement
- Paying off higher-interest debts
What is a HELOC?
Like a mortgage, a HELOC is secured by the equity in your home. Unlike a mortgage, a HELOC offers flexibility because you can access your line of credit and pay back what you use just like a credit card.
You can use a HELOC for just about anything, including paying off all or part of your remaining mortgage balance. Once you get approved for a HELOC, you could pay off your mortgage and then make payments to your HELOC rather than your mortgage. Note that HELOC rates are variable, which means the rate can fluctuate up or down and is tied to a known index, usually the prime rate.
Important HELOC factors to consider
The interest-only repayment option is an attractive feature of a HELOC. However, at the end of the draw period, the interest and principal will be rolled into one amortized monthly payment for a loan term of 15 years. You have to be prepared for this or the increase in your monthly payment (which will now include principal as well as interest) could catch you by surprise and hurt your finances.
You could choose to make payments toward the principal each month to space these out rather than have the large payment at the end. Since these are not automatically included in your monthly bills, you will need to let your lender know how much you want to apply to the principal. Look into your loan agreement to find out if there are any prepayment penalties. These usually apply only if you actively pay off and close your account. Generally, small monthly payments will not affect these penalties, but youll want to be sure.
HELOC to Pay Off Mortgage
FAQ
How do you pay off a home equity loan?
Can home equity loans be paid off early?
What is the monthly payment on a $50,000 home equity loan?
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Loan amount
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Monthly payment
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$25,000
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$166.16
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$50,000
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$332.32
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$100,000
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$673.72
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$150,000
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$996.95
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What is the smartest way to pay off a HELOC?
Can I pay off my home equity line of credit early?
HELOCs allow you to make interest-only payments during the draw period, then you can make principal and interest payments later. Additional principal payments on a home equity line of credit reduce your monthly payments and get your loan paid off sooner. Borrowers often wonder if they can pay off their home equity line of credit (HELOC) early.
What happens when you pay off a home equity loan?
When you pay off part of the principal, those funds go back to your line amount. It’s important to understand that most home equity lines of credit tend to have variable interest rates, while home equity loans are fixed. Sometimes borrowers can negotiate with the lender about getting a fixed rate for the remainder of the loan repayment period.
Can I use equity to pay off my mortgage?
Yes. There are many ways to use equity to pay off your mortgage, but two of the most common approaches are second mortgages and home equity lines of credit (HELOCs). Second mortgages have the same payment each month and give you a lump sum at the start of the loan, which you could use to pay off some or all of your mortgage.
How do I pay off a home equity loan early?
There are three ways to pay off a home equity loan early: Lump sum: If you’ve saved the remainder of your loan amount in a separate account, you can pay it off in one payment. You’ll have to call your lender to find your final payoff amount.
Should you pay more for your home equity loan?
Many borrowers choose a longer term for their loan so that they have more breathing room in their monthly budget with a lower monthly payment. But if they find that their income increases, paying more toward the principal of their home equity loan can save significant interest payments.
How do I pay off my mortgage?
Pay off your mortgage. Withdraw the amount needed to pay off your mortgage balance from your credit line and send the payment to your mortgage servicer. Make HELOC interest payments. Many HELOCs only require interest payments during the draw period, although you may want to repay the principal during this time to reduce your total interest.