Use a HELOC to pay off a mortgage?

71XYGTHO · #1 (**permalink**) 01-12-2009, 10:56 AM

Hello all.

First post. Here is the situation.

We owe < 25% on our house (reasonable & current valuation) and have a decent amount of cash on hand. We opened an HELOC to help purchase a car, with the thought that it would keep most of our money liquid.

We've decided that we probably won't use it the to buy the car, but the idea struck me; should I consider using it to pay off the house?

Our mortgage is 4.625 (fixed). We always overpay and, assuming continued payments, would have it paid off in five years.

The HELOC interest rate is currently 3.75 (variable), but I don't see them jumping any time soon. I also have the possibility of calling the bank and locking in the rate (hopefully lower than 4.625).

Since the HELOC interest is also deductible, I'm trying to figure out the downside to this idea.

Any thoughts?

Thanks in advance!

ksluis62 · #2 (**permalink**) 01-13-2009, 03:31 AM

I think you're doing just fine the way you are. I'd keep paying down the existing mortgage, accelerating payments as you can to get it paid off. The HELOC is a great idea to maintain liquid funds for emergencies, a car if you decide to do that again, or even investing. I use a HELOC for real-estate investing, and have purchased several investment properties using cash from a HELOC.

The slight down-side I see with paying off the existing mortgage with your HELOC is that the HELOC usually is interest only (not sure if yours is), opening the temptation that you won't pay down the principle as with your mortgage. You are in the enviable position where most of your mortgage payment pays down principle. This is money in the bank. Any "young" mortgage payment goes mostly towards paying interest, as your HELOC will.

If you decide you want to do this anyway, I like your idea of locking in a fixed rate. I think rates will be low for a while, but the current financial crisis may eventually lead to much higher rates.

Just my $0.02. Good luck!

hkirschstein · #3 (**permalink**) 02-03-2009, 07:05 PM

Greetings! I just stumbled across this forum and your question and wonder if you can answer one for me! I am going to pay off my mortgage with a HELOC and wonder if you would share with me where you found a rate of 3.75%? The lowest I've been able to find is 3.99%. Thank you very much!

Andy · #4 (**permalink**) 02-12-2009, 12:09 PM

I am not sure if you have used a HELOC before but I suggest you consult a tax accountant before you do anything. Not ALL HELOC interest is deductible, it depends on what the money was used for, home improvement for example is acceptable. Check with your tax professional.

I usually suggest that a HELOC be used for emergencies or for investments with a short turn around and good profit. You can use it for other things too but you have to ensure that you will be able to pay it off quickly and remember that it is actually putting your house at risk if you should default.

cherbob85 · #5 (**permalink**) 03-16-2009, 10:29 PM

I stumbled across this thread and it is pertinent to what my wife and I are thinking as well. We currently have about 9 years left on a 15 year fixed mortgage at 5.125%. We can use our HELOC at 3.25% with the credit union I belong to. It is almost a 2% difference. It sounds interesting, but I would have concerns about the direction of interest rates over the course of the next 7 years or so. Additionally, we would need to heed the advice above to see if the interest is deductible. But if it is deductible do you think this is a good direction to take?

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