Paying off a mortgage is a huge goal for many Canadians, especially those nearing the end of their amortization periods. Some may wonder if it’s worth paying it all off in one lump sum using the funds from a HELOC. However, while it is possible, there are better options than this one, and there are several things to be aware of before taking this route.
What is a HELOC?
HELOC stands for Home Equity Line of Credit and is a revolving, secured credit in which a lender uses your home as a guarantee against the loan. Since HELOCs are revolving credit, you can borrow money, pay it back, and borrow again up to the maximum limit without reapplying.
Many people use HELOCs to secure funds to do home renovations or improve their property. However, it can have other uses as well. For example, HELOCs typically have much lower rates than credit card interest or personal loans and can be helpful in emergencies. But remember that your home is the collateral, so you must be incredibly careful.
Can You Use a HELOC to Pay Off Your Mortgage?
Technically, yes, you can use the money from a HELOC to pay off your mortgage. However, remember that you are using your value to pay off your home with your home equity. So, if you just purchased your home and needed more equity, it will do you little good. In addition, depending on your contract, you must also be mindful of any prepayment penalties attached to your mortgage.
Should You Use Your HELOC to Pay Off Your Mortgage?
While it is possible using a HELOC to pay off your mortgage, most experts would not recommend something other than this strategy because the cons tend to outweigh the pros.
Pros
- Offers easy access to credit after approval
- Lower interest rates than many other types of loans
- No prepayment penalties; you can pay it back as quickly as you like
Cons
- As mentioned above, the amount you can borrow from your HELOC depends on the equity you have in your home.
- To apply for a HELOC, you may need to pay administrative fees for things like a title search and title insurance, legal fees, and appraisal fees, which all add up quickly. You should also be mindful of any costs associated with the HELOC itself.
- Regarding interest, HELOCs have variable interest rates, which means they can go up and down. If you prefer the security of a fixed rate, then a HELOC isn’t a good option.
- Even though the HELOC has no prepayment penalties, your mortgage might. So, using your HELOC doesn’t necessarily mean you can pay it off faster.
- Opening a HELOC to pay for your mortgage adds more debt
Why Would Someone Use Their HELOC To Pay Off Their Mortgage?
The only time to think about using a HELOC to pay off your mortgage is when you are at the end of your payments and don’t have much left. That said, there is still much to consider before going down that path.
What is worth noting is that you can use a stand-alone HELOC as a substitute for a mortgage if you want to buy a new home. This gives you more flexibility regarding payments, and you don’t need to worry about prepayments. However, if you choose this method, you need a higher minimum down payment or more equity.
How to Use Your HELOC to Pay Off Your Mortgage
If you choose to use your HELOC to pay off your mortgage, you must apply for a HELOC if you don’t already have one. You can then withdraw the necessary funds needed to pay off your mortgage. Once you pay off your mortgage, you will have to pay back your HELOC. There is no payment schedule, so that you can pay it back as you please. Remember, though, the collateral to your HELOC is your home, so you do need to be careful and responsible in paying it back.
Options to Pay Off Your Mortgage Faster
If you are looking for options to pay back your mortgage faster, there are much better options than trying a HELOC to pay down a mortgage. The best option is to speak with your mortgage lender and see what your contract allows regarding prepayment. Many mortgage products offer prepayment options such as annual lump sum payments up to a certain amount or additional payments each year. You can also choose accelerated payments, allowing you to put more money down yearly than just a monthly payment.
If you are shopping around the renew your mortgage, then these factors are something you will want to keep in mind as you compare mortgage products. If you keep within the conditions listed in your contract, these options will allow you to pay off your mortgage faster without worrying about penalties.
Final Thoughts
A HELOC can be a convenient tool for many things, but better options exist than paying off your mortgage. If you are looking to pay off your mortgage faster, you are better off sticking to methods that don’t incur extra fees and penalties and don’t add more debt.
