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If you’re like many homeowners, you’re probably sitting on a lot of home equity right now and wondering if you can put it to good use.
“People have a lot more equity than they have [had] in the past,” says Matthew Locke, national mortgage sales manager at UMB Bank. Home value growth in 2021 — spurred by soaring home prices amid a competitive housing market — exceeded median salaries in 25 of 38 major metros, according to real estate marketplace Zillow.
Funding home renovations and consolidating debt are two tried-and-true uses for your home equity, but what if you want to use it to pay off your primary mortgage?
Using a home equity line of credit (HELOC) to pay off your mortgage is possible, but it depends on how much equity you have and how large the remaining balance on your mortgage is. Doing so could save you money if you’re able to get a significantly lower interest rate than your current mortgage rate, but this strategy also carries significant risks. HELOCs are variable rate products, meaning your interest rate and monthly payment could unexpectedly change at any time — a likely possibility given the current rising rate environment.
Here’s how using a HELOC to pay off your mortgage can work, and the key drawbacks and considerations experts say you should be aware of before you jump in.
Can You Use a HELOC to Pay Off Your Mortgage?
Let’s start with the basics: A home equity line of credit, or HELOC, is a revolving line of credit that acts as a “second mortgage” on your house and allows you to borrow against your home equity. It works something like a credit card: You can spend the balance as much or as little as you want during the draw period, up to a certain limit, and then pay back only what you use.
It can be an attractive option for many different reasons — namely flexibility and low or no closing costs — and a lot of borrowers are using them these days to fund home renovations.
Using a HELOC to pay off your mortgage is more unconventional, but it can be done, Locke says.
Here’s how it would work: Let’s say you had a 30-year mortgage with a principal balance of $300,000 and an interest rate of 6 percent. After 27 years of payments, the remaining balance on your mortgage …….