Save by Replacing Mortgage with HELOC

Dear Dr. Don, I am retired and living in my home. My remaining mortgage balance of $85,000 will be paid off in three years. I am paying mostly principal now, and I have more equity in it than I owe. Would it be more advantageous for me to borrow from my equity line of credit now at a lower interest rate and pay off the full mortgage now? This maneuver would also enable me to sell the house and pay back the line-of-credit loan at my leisure or do a reverse mortgage that would sustain me for quite a while. I can afford to pay off the mortgage, but I want to continue with a line of credit -- just in case I need it.

Thanks, -- Sophie Senior

Dear Sophie, Let me start by saying there is no leisurely repayment of a home equity line of credit after the sale of a home. A HELOC has to be paid off when the home is sold, just like the mortgage.

If you expect to be able to pay off the $85,000 over the next three years, then it's a reasonable strategy to use the lower-cost line of credit to pay off the higher-cost mortgage. It's typical for a home equity line of credit to be an adjustable-rate loan. The rate would trend higher if the short-term interest rate the loan is based on trends higher. But the Federal Reserve has signaled that it doesn't plan to increase its benchmark federal funds rate anytime soon, and other short-term interest rates follow changes in the federal funds rate.

You can do a reverse mortgage if you have an existing first mortgage or HELOC in place. What happens is that any outstanding mortgage debt is paid off at the closing of the reverse mortgage loan. Outstanding mortgage debt will, however, reduce the amount of new money you can get from a reverse mortgage.

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