Can You Really Pay Off Your Mortgage Early with a HELOC?

There’s a new strategy floating around the personal finance world: paying off your mortgage faster with a home equity line of credit, commonly known as a HELOC. The strategy alleges that you can pay off your mortgage in just a few years.

Will it work?

On paper it’s brilliant, but I think most of us easily recognize that paper theories don’t always work in the real world. On closer inspection, the HELOC method looks to be more of a myth than anything else.

But let’s take a look at the strategy and consider the likelihood of it succeeding.

The “Cliff’s Notes” Version of the Strategy

The “method” of paying off your mortgage early using a HELOC is more than a little complicated. You can read the full version of the strategy here, but here’s a summary of how it works:

  • You must have a positive cash flowthat is, your monthly income exceeds your expensesthe more the better.
  • In select months, you put your entire paycheck towards your mortgage.
  • You need a credit card, one that will give you “free money” (a grace period) for up to 45 days.
  • In the months when you put your entire paycheck towards your mortgage, you put the rest of your expenses on your credit card.
  • You add a HELOC to your home, preferably one with a debit card.
  • After the end of the credit card grace period, you transfer your entire credit card balance to the HELOC.
  • With your next paycheck, you pay off your HELOC balance, instead of your mortgage.
  • The next paycheckafter the one that pays off the HELOCis once again applied to your mortgage.
  • Repeat the cycle again and again.

Confused? Let’s work out an example.

Say you have a $200,000 mortgage, and your net paycheck is $5,000 per month. One month, you apply your whole paycheck to the mortgage. This immediately lowers the mortgage balance to $195,000. That month, you pay your non-housing living expenses, say $2,000, using your credit card.

Then, you pay your mortgage payment, say $1,000, using your HELOC. You also pay your credit card balance with your HELOC.  At the end of the month, you owe $3,000 on the HELOC and $195,000 on the mortgage, but your credit card has a zero balance.

The next month, your $5,000 paycheck goes to paying $1,000 for the mortgage payment and $2,000 for living expenses. The remaining $2,000 reducing the HELOC to $1,000.

In the third month, your $5,000 paycheck goes to paying $1,000 for the mortgage payment, $2,000 for living expenses, and $1,000 to zero-out the HELOC.

That leaves you with an extra $1,000, which you carry over to the fourth month. And in the fourth month, you repeat the original cycle of paying your entire $5,000 paycheck toward the mortgage, lowering it to $190,000.

If you are successful in managing this strategy, you should be able to manage four $5,000 payments toward your mortgage each year, above and beyond your regular monthly mortgage payments. That means paying an extra $20,000 of mortgage principal each year.

At that rate, your mortgage will be paid in full after substantially less than 10 years (remembering that the regular mortgage payments that you are continuing to make will also reduce the mortgage balance in increasing increments).

It looks like a brilliant plan, but why is this method unlikely to work?

The Strategy is Too Complex to Be Workable

In general, the best financial strategies are the ones that are most simple. Simplicity is the basic concept behind dollar-cost averaging and investing in index funds. Simple means that you don’t have to think about it, or struggle to make it happenand that’s exactly what it takes to make it work.

The HELOC strategy is anything but simple. You’re essentially setting up a scheme based on debt. This scheme is used not only to pay off your mortgage, but also to manage your entire financial situation. It means that you’re constantly juggling between a credit card and a HELOC, while putting all of your extra money into your first mortgage.

It Will Take More Discipline Than Most People Have

Apart from the fact that it will take discipline to manage the complexity of the HELOC strategy, it will also be very difficult to keep it going during times of financial stress. And you can bet that such times will develop well before your first mortgage is paid off.

For example, the loss of a job will put a hold on the entire strategy. Depending on where you are in the cycle when that last paycheck comes in, you could get stuck with extra debt, too. And if your new job pays less, you may not be able to resume the practice.

In addition, you may get sidetracked by personal factors. For example, since you will be making liberal use of both a credit card and your HELOC, the temptation will be great to use both lines for unrelated purposes.

Using debt as part of any strategy is like playing with fire. That’s because as you become more comfortable using debt, the possibility of abusing it becomes ever greater. It will take incredible discipline for the several years that it will take to pay off the mortgage to avoid landing in a worse financial situation.

You’re Replacing One Form of Debt With Another

The HELOC strategy is at its heart a debt strategy. You’re using a credit card and a HELOC to pay off your mortgage. In the short run at least, that means replacing long-term debt with short-term debt.

The only way to truly get out of debt is by paying it off out of your income or other assets. Using debt to pay off other debt has the real potential to go in an unexpected direction. For example, if after five years of using strategy your $200,000 mortgage is paid down to $100,000, but you now have $100,000 in credit card and HELOC debt, you will have accomplished nothing constructive.

The Strategy is Unlikely to Work Quickly

Like so many other strategies that make miraculous claims, it’s unlikely that you’ll pay off your mortgage in just a few years. First, step back and consider the implications of paying an extra $20,000 per year into your mortgage until it’s paid off. How long will you be able to make that effort?

What happens if along the way you decide you want start a business, or you incur huge medical costs, or you find yourself needing to direct a large amount of your income into taking care of a stricken family member?

The HELOC strategy will have to be abandoned. It’s called life, and it has a way of getting in the way of high-minded plans, especially big ones.

A strategy that requires this amount of money and level of discipline will have to be completed in a few short years, otherwise you will likely tire of the effort. For example, if you’re only able to apply a single monthly paycheck to your mortgage each year, the plan you were hoping would be completed in say eight years, may take more than 20.

HELOCs Are Variable Rate Loans

Using a HELOC to pay off your first mortgage is an unequal exchange. This is because HELOCs have variable rates, while first mortgages usually have a fixed rate. You may be exchanging a fixed rate of 3.something or 4.something, for a variable rate HELOC that could conceivably jump into double digits in a rising interest rate environment.

This will be a serious problem if you’re unable to maintain strict control over your use of the HELOC for the intended purpose only. Not everyone can manage that.

HELOC Lines Can Be Frozen By the Bank

Back in the financial meltdown after 2007, many banks took to freezing HELOCs. They’re revolving lines of credit, so banks are within their rights to do that even if you have been faithfully making payments. That could leave you with a debt obligation that needs to be serviced, but no ability to tap the line further to continue your HELOC strategy.

Don’t be so sure that HELOC freezes won’t happen again in the future. Whatever has happened in the past is very likely to be repeated. And if your strategy for paying off your mortgage relies on a HELOC, your bank could put a sudden end to your effort.

There Are Better Ways to Pay Off Your Mortgage Early

There are less complicated ways to pay off your mortgage early, and they will generally give you more control over the process.

Make extra principal payments. You can choose to pay a certain amount of extra principal to your regular monthly payments. It could be $100 per month, or be something less formal, like paying an extra $1,000 each year. Not only will this reduce the term of your mortgage, but it will also give you complete control of the process along the way. You can make extra payments either higher or lower, depending upon your financial situation at the time.

Make one extra payment each year. By making just one extra payment per year, you can reduce a 30 year mortgage down to 26 years. This is the same effect as a biweekly mortgage payment arrangement, since a biweekly mortgage effectively creates 13 payments per year.

Pay your mortgage based on a shorter term. If you have a 30-year mortgage, you can make payments based on a 20-year term, chopping a full decade off the loan.

Create a “sinking fund.” This is actually a concept from the business world. Companies often set up what are known as sinking funds for the purpose of retiring specific debts. It’s a matter of adding money to a dedicated savings account, until the balance is sufficient to pay off the loan completely. You can do the same thing to pay off your mortgage. It has the advantage of giving you control of the money until you’re ready to completely pay off the mortgage.

Keep in mind that paying off a mortgage is a long-term process, one that will take many years. For that reason, the method that you choose must fit comfortably within both your personality and your financial situation.

And the HELOC method? It’s interesting, I’m sure you’ll agree. But it’s not likely to work for most people. And for some, it could turn out to be a disaster.

Topics: Mortgages

29 Responses to “Can You Really Pay Off Your Mortgage Early with a HELOC?”

  1. It’s definitely risky. HELOCs often have an interest only period for several years before principal payments are due. Your mortgage could suddenly go from $1000/month to $500 per month because of it. Undisciplined people may just spend the other $500 instead of using it toward paying down the debt.

  2. Usman Ansari

    Kevin, it seems like your preferred methods of early repayment would also be applicable to paying off student loans before the typical timeframe. In fact, it would be great if you could write an article dedicated to doing this…

  3. Just reading through the process made my head hurt. It already takes everything within me to come up with a budget and I know for sure that making my finances more complicated than they already seem to be would be a recipe for disaster. I’ll stick to the monthly payment!

  4. This strategy seems too complicated and the gain is unclear to me. Why wouldn’t you just send the extra $2k from your monthly income directly to your mortgage?

  5. Every complicated mortgage payoff strategy in the end boils down to “pay extra towards the principal.” This applies to this HELOC scheme, biweekly payments, money merge accounts, etc. If there is any additional savings beyond paying extra, it’s always tiny at best. And it gets more than canceled out by the fees charged for the scheme.

  6. The mortgage would be paid just as quickly without the credit card or HELOC. In this example, $6k principle was paid off over 3 months. A much simpler, smarter plan would be to use your $5k/mo to pay the $2k living expenses, $1k interest, and $2k principle each month. This article was mind-numbing, and leaves me to believe that there is perhaps some other benefit to this strategy that has not been mentioned.

    • This was the conclusion I cam to as well. I ran two scenarios, one using the HELOC and paying off the debt with surplus monthly income, and one with just applying the surplus to the loan each month. The HELOC did save about 6 months, and $600 of interest on my example, but you sacrifice flexibility with the HELOC, and don’t get a whole lot more in reduced loan time or interest.

      The only other benefit I could think of was more pressure to pay off the HELOC, or a derivative of forced payment (similar to forced savings) when you are pressured to pay off the HELOC. Just paying the surplus doesn’t “force” you to pay, so some people may be less likely to pay it. But I don’t really see the benefit of this strategy. I really wanted to, but couldn’t find it.

    • I think the general idea of using the HELOC is that you maintain liquidity whereas if you just paid off the mortgage, there is no going back until you sell the house or get a HELOC to retap the money you sunk in. There is no magic behind this HELOC strategy, and you would certainly pay of the mortgage faster had you just did direct payments on the primary. However, you put yourself into a liquidity trap by paying it off directly.

      I personally don’t see the advantage to paying off the primary right away. If you are disciplined enough to go through all these hoops, why not just hoard your reserves into some low risk investments, such as an S&P fund. The money will grow above the current mortgage interest rates and you can always become liquid if the need should arise. When the pile gets big enough, you can just pay off the mortgage if you want that payment to go away.

      • James Sommers

        Amen, brother! Why be in a hurry to pay off a 4% interest loan? Now, I’m not suggesting that you put your surplus on the Vegas crap tables, or even today’s hottest stocks. However, consider putting 6 month’s mortgage payments in cash reserves, and then the balance in a diversified risk stock, bond and REIT portfolio. 8% annual income/growth is very easy to achieve without significant risk.

  7. I’m for HELOC. Traditional mortgage loans get charged interest that can make a $200,000 mortgage cost $400,000 if you factor in the interest of the loan for 30 years. With a HELOC you only get charged interest on how much credit you are using in the revolving credit line. If the mortgage is $200,00 you get charged the HELOC interest rate, which will still be less than $400,000 because the first 2 years of a HELOC the rates are really low. (Around 2% or less) But after a few years and you pay off $25,000 of principal, the HELOC only charges interest on what’s left on the principal. So $175,000 will be charged interest. For another few years, another $25,000 is paid off to the principal, now you’d only get charged the interest on $150,000 and so forth. Interest is the big killer when paying mortgages. Think about it.

    • Excellent comment and explanation, I’m already started to use this strategy using a Personal Loan Credit. I am in the 11 year of the mortgage but you are right, this strategy is a killer of interest.

        • Ya, it’s always interesting to see how many uneducated people are out there or how afraid they are of any level of risk or complication. It’s great, it creates opportunity for others. I think this strategy can be great. I really dislike how the article kept saying that one of the main reasons this strategy won’t work is discipline. Obviously if you have no financial discipline this strategy is not for you, the article would have made more logical sense to lead in with “This won’t work for you if you don’t have discipline, if you do, read on and I won’t mention it again”.

          • I am seriously looking into starting a HELOC chunking plan soon. I have achieved a debt free lifestyle, besides my mortgage, and I have the income/expense ratio to handle this type of aggressive debt shuffling. I wish everyone could do this then we’d have waaaay less people losing money to mortgage lenders.

  8. Johnny

    Lol. It’s very clear that author doesn’t understand the process. It’s actually way more simpler than he tries to explain. It works. 2 friends have paid off their house like this.

  9. David Welles

    I am an expert in this strategy. My name is David Welles and I am the co founder of Truth In Equity. My business Partner Bill Westrom and I started Truth In Equity out of the kitchen of my home on September 8th 2006. I met Bill when I was working as a Mortgage Broker for Cannon Mortgage. Bill was working as an AE (Account Executive) for MacQuarie Mortgage USA. He was selling MacQuaries Asset Manager (aka Money Merge Account and also Home Ownership Accelerator). It was a First lien HELOCloan and checking account all in one. These loans were later named by other banks as the “All In One” account as well as the afore mentioned loan names. Household finance, GMAC, Indymac and a few others started offering them prior to the housing market implosion. At the time prime rate was 8.25% and we helped hundreds of people during the 2006 – 2009 time frame. People with 5% fixed rate and payment loans were refinancing into the loans we were selling at 8.25% variable rate and it still made mathematical sense because of the “OFFSETTING” taking place due to large monthly deposits into the account, the daily balance being forced down and the interest savings (daily) due to the outstanding balance recasting interest charges. The formula “Balance divided by Surplus divided by 12 (months in a year) equals the Pay off in years”. If your numbers are applied to that formula and the pay off is less than 10 years we knew the strategy would work in that scenario. For example $200,000.00 debt balance divided by an $8,000.00 a month income where there is a $6,000.00 a month expense leaving a $2,000.00 surplus would look like this – $200,000.00 divided by $2,000.00 (surplus) equals 100 months divided by 12 equals 8.33 years. This formula is nearly 100% accurate EVERY TIME.
    Bill Westrom was struggling getting brokers to understand how the loan worked and the looming housing crisis made things even harder. Bill had built an excel spreadsheet that definatively illustrated how the loan works by depositing income directly into the HELOC that functioned like a checking account and in most cases where people earned more than they spent the loan would pay off in an accelerated time frame and saved the homeowner 10’s of thousands of dollars.
    Around July of 2006 Bill was asked by MacQuarie executives to suggest ideas on how MacQuarie could better deliver their Asset Manager to Mortgage Professionals so that the loan became more popular and widely used in place of the 30 year or 15 year or ANY fixed rate and payment mortgage. Bills idea was to take it directly to the public. That idea was not adopted and they asked Bill if he had any other ideas. He said yes “Heres My Resignation”. When he decided to leave MacQuarie he knew that his sophisticated spreadsheet illustrating the accelerated amortization where the loan, income and expense structure was set up properly, would be a critical piece in helping people comprehend the loan performance. That spreadsheet has evolved to an online calculator and tracking tool in use today by thousands and thousands of “Equity Optimization” strategy users. Bill and I spent 10 months going from bank to bank all through Florida trying to convince them that the loan would perform better and attract more depositors. Only one Bank was eager to jump on board. Wachovia bank President in the Hernando County Florida area liked the idea so much he secretly called MacQuarie Mortgage and tried to build relations and implement the loan. Fortunately for Bill and I, Wachovia closed down and wasnt able to get in front of us. We knew we had a winning strategy when the district President for a major bank was willing to take our idea and run with it.
    Around June of 2007 Bill and I had exhausted all of our personal resources trying to get banks to help us sell the loans to the public and we knew that the public was going to drive the demand for the concept if they only knew how it worked. We had placed a few customers in the loan using Indymac, household and GMAC but it wasnt enough to get the idea out there. Bill was listening to a podcast where “Jordan Goodman” was being interviewed. Jordan Goodman is a well know “Money Answers Man.” Bill emailed Jordan a simple question: “How are you instructing your listeners on the difference between internal control and external control of their money”? Jordan replied: “I have no idea what you are talking about” and asked Bill to call him. Bill phoned Jordan, explained what we were doing and Jordan asked if he could meet us so that we could show him what we were doing. Jordan Goodman flew from New York to Florida, sat in my living room where Bill and I projected on a big screen the spreadsheet Bill built and we went through scenario after scenario trying to disprove our theory. Jordan was amazed at how the loan performed in a range of income/expense and rate reduction and/or raising environments. We took loans from 8% down to 3% and up to 21% and in every case proved the concept works. Jordan Goodman has been talking about Truth In Equity ever since. We have been on countless radio and TV shows and have even co authored a book “Master Your Debt” with Jordan Goodman.
    Our website allows visitors to see for themselves using their own numbers. You enter your budget information, the calculator produces a summary analysis and a trained strategist gets you on the phone and shows you the Truth behind the math. You receive a free eBook explaining the science behind the math driving “Offset Accounting”.
    We have been doing this for over 10 years. There are now copy cat companys like “Replace Your Mortgage” and “Sweep Strategies” and a few others that have popped up on the scene since. Many of them were visitors to our site representing themselves as interested visitors but were really just trying to figure out how we were doing it so they could start their own businesses. I even discovered that the H.E.A.P. plan was modeled after a copy of Bills spreadsheet. Some how our spreadsheet was obtained by the H.E.A.P. plan developer as well as CMG and was being presented as their own. You can go to the “Way Back Machine” and look at the day month and year ANY website came on the scene and see we were the first years before anyone else caught on. Our original company name IFS Development Group later became Truth In Equity. Since then many have tried to duplicate our system but are deficient in many ways because our system is based on scientific study, years in practice and developments in alternate methods of approach. You do not need to Replace Your Mortgage with a first lien HELOC. In fact a 2nd lien or PLOC works in many cases. We had to come up with alternates in order to help a broader range of people with tighter numbers. For instance someone with a high LTV cant get a first lien HELOC but with an alternate approach, is able to accelerate pay off and in a year or two be in a stronger LTV position and make adjustments leading to a more favorable pay off and savings. I have been helping thousands of people WORLD WIDE for over a decade and we are a true testiment to the successful implementation for families in every state in the nation. We are the root cause of the strategy being deployed, used and gaining popularity. As a practitioner of the strategy, co owner and developer of the leading company providing this service and impetus to the development of many happy families, I will say with great certainty, “This strategy works”. We have a saying however, “Prescription With Out Analysis IS Malpractice”. You must first have your scenario reviewed by an EXPERT. We are the experts. We have the experience, tools, resources and litany of participants that prove the concept. Anyone can go to our website and email or communicate directly to our customer base. Our clients are so happy they WANT to tell their story. You can go to Truth In Equity and directly communicate with people who have done this for themselves. Anyone who comments on this concept with out first doing empirical study, due diligence or testing the math with transparency and uncontestible formulas are only speculating on what they THINK is going on and NOT what is REALLY taking place when using a HELOC for a mortgage instead of a conventional loan. Don’t take my word for it. Ask a real customer or go to TruthInEquity dot com and see for yourself. I will personally compare a conventional amortization schedule to our calculator and show the contrast in the math with anyone who visits and wants to be enlightened with FACT. You dont need to Replace Your Mortgage.

    • James Pierce

      You made an Outstanding argument in favor of this. I am seriously looking into setting this up for myself. I currently have a HELOC at 2.79% that I have had for 5 years and just paid it off. I was told I only have 12 more months to borrow from it however so I don’t know if I need to renew my current HELOC or have to apply for a ne HELOC. What would be your suggestion at this point?

  10. Terence

    It looks like this article is only assuming the HELOC is in a 2nd lien position rather than a 1st lien position. The author also doesn’t fully understand the strategy that’s being used. Sure there is some risk but if done with a full understanding and correctly, this strategy can work as people have had much success with it. If you want to know the real strategy check out Michael Lush’s videos on Youtube.

  11. best thing is to focus on paying off mortgage early – no movies, no restaurant, no car leese, no new cars, no vacations, no new wardrobe, no new anything…. you just live and pay, live and pay. do this for 7-8 years and pay off your mortgage. get a part time job and get it done in 4-5 years. then, live your life mortgage free FOREVER!

  12. I am stumped to this strategy but let me tell you much simpler one that may work by hedging inflation. For example in countries like India the property value doubles every 4 years due to inflation and demand. If you invest 100k in a property there. by the 8th year your property is work 800k..yes easily and 12th year its worth 1.6M. Pay the 15% tax and get the money to pay the house here for free. Not so simple but for people with feet in 2 countries its do able

  13. I came across this because I have been fairly Diligent about paying my mortgage off faster with additional principal payments. The issues are: my interest rate is 6.25% because it was issued in 2001. My credit took a few hits but now is raising over 700. My principal balance remaining is only $40,000 now, so apparently it is hard to make a refi make sense, if you can even get one for that little amount. I’m definitely disciplined enough to work this, but I’m not sure it makes sense. Seems to me the only way your money is still Liquid is through debt. I can put an entire paycheck into a mortgage payment on my own (easy) but I prefer to save that money or invest it. I’d still like to lose the 6.25% though.

    • Stephanie Colestock
      Stephanie Colestock

      My recommendation would be to put your money toward the higher interest rates. If you’re earning more on your investments, and already have enough saved up for an emergency, start routing the cash there. A mortgage with 6.25% isn’t necessarily low, so you could also direct some of your excess savings toward that (since you’re unlikely to be earning anywhere near 6.25% off of it, regardless of your savings vehicle).


  14. I’m an actual client of replace your mortgage and whoever crested this article is completely wrong. The way you’re explaining it is by using a heloc in 2nd lien position. Meaning you still have a mortgage in front of that heloc. The way the strategy works is you replace your entire mortgage into a 1st lien position heloc and just treat your heloc as if it was your checking account. You out all your income into the heloc and pay your bills out if the heloc and whatever is leftover in cash flow stays in the heloc with brings down the daily balance and interest. It’s really that simple.

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