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How Does One Pay Off Their HELOC?

How to pay off your HELOC? That's the question on many people's minds these days. Since 2010, the percentage of homeowners with home equity lines of credit (HELOCs) has increased significantly as home equity soars past the $8 trillion mark.

Tapping into that equity is not without risks, but it can help you avoid foreclosure. At the same time, you turn your finances around by paying off high-interest debt and using the HELOC money to buy down your principal balance on your mortgage.

How to pay off your HELOC? You'll need a plan that includes living within your means, cutting spending, and increasing income, as well as knowing how much you can afford to pay each month toward the HELOC and what you can afford to do after that.

Here's how you should approach it:

Use the HELOC as a checking account

A HELOC is best used as a checking account. After all, the money is yours. Use it for regular expenses such as utilities and property taxes. You don't have to worry about being charged an insufficient funds fee or an overdraft penalty.

You can make periodic withdrawals when you need to pay for unexpected expenses and then pay yourself back over time. Just remember not to spend more than you have!

Before you do this, it's important to first assess your spending habits and determine how much money you can put toward your debt each month. After all, the faster you pay it off, the less interest you'll end up paying in the long run.

Once you've worked out a payment plan, get everything set up so that your payments are automatically drafted from your bank account or paycheck every month.

Put your paycheck into the HELOC as a direct deposit

If your company offers direct deposit of payroll checks into another bank account, set up direct deposit into your HELOC instead of your checking account. The interest rate on most HELOCs is much higher than what you'd get from any traditional bank.

Direct deposit also ensures that one less bill will be arriving each month because those payments go directly from your employer straight to the lender. By redirecting your paycheck into your HELOC, you'll probably never even miss them.

Renegotiate a new HELOC with a lower interest rate

Renegotiating a new HELOC with a lower interest rate can be a great way to save money and repay the debt faster. If you have seen your home value go up, then it is possible to renegotiate the terms of your existing HELOC.

If you're behind on any of your payments or if you're only putting minimal amounts toward paying down the principal, then there's little reason for the bank to lower your rates at this time. But if you've been paying consistently on time, then it's worth a try!

Investment adviser giving a presentation to a smiling young couple seated at her desk in the office

Pay extra on your bill each month

When money loses value — which happens over time — a dollar today provides less buying power than a dollar tomorrow. So when you're repaying debt, the sooner you make extra payments, the more you gain from inflation's eroding effects over time.

Let's say that you have an existing $100,000 home equity loan with a 4 percent interest rate over 30 years. This means that the monthly payment is $302.50. If you decide to pay extra each month, you can use any of the methods below to make additional payments.

You could choose to make one additional payment per year (i.e., 12 payments in a year and then one final payment). Or you could choose to make monthly payments of $375 for 15 months and then continue with your regular monthly payments until it is paid off.

These figures are based on an interest rate of 4 percent over 30 years. Your actual interest rate will vary depending on the length of the loan and your credit score.

Pay off your credit card balances to improve your credit score (helps you renegotiate a better HELOC)

Make a plan to pay off your credit cards. There are two reasons for this. First, having a lot of credit card debt can negatively impact your credit score. Second, paying down a large amount of debt can give you some financial breathing room.

You may get a lower interest rate on your HELOC once you've paid down balances on all those cards in your wallet. Paying off debts sooner rather than later is also helpful for gaining control over your finances and freeing up cash flow.

To be sure, using too much of your available credit makes lenders nervous — they're afraid you won't pay them back — and thus hurts your ability to secure new lines of credit, like an auto loan or home equity line of credit (HELOC).

That's why it's smart to use no more than 30 percent of the available credit on all of your cards combined –– if not less. If you have $10,000 in available credit, you should use no more than $3,000 per month on average –– regardless of how much money you make or how much cash you have in the bank.


You can pay off your HELOC in less time than you might think!

With over 50 years of mortgage industry experience, we are here to help you achieve the American dream of owning a home. We strive to provide the best education before, during, and after you buy a home. Our advice is based on experience with Phil Ganz and Team closing over One billion dollars and helping countless families.

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