You're sitting at the kitchen table, looking at two different sets of numbers. On one hand, you have your primary mortgage—maybe it’s a 30-year fixed with a chunk of principal still sitting there like a stubborn weight. On the other hand, you’re looking at your home’s value, which has likely shot up over the last few years. It’s tempting. Really tempting. You start wondering if you can just use a home equity loan to pay off mortgage balances entirely. It feels like moving money from one pocket to another, but if the new pocket has a lower zipper or a better fit, why not?
But here is the thing.
Most people think of this as a simple "swap." It isn't. When you take out a home equity loan (HEL), you are essentially taking out a second mortgage to kill the first one. It’s a debt replacement strategy. Sometimes it’s a stroke of genius that saves you thousands in interest. Other times? It’s a convoluted way to reset your debt clock and pay more to the bank over time.
Let's get into the weeds of why this is even a conversation in 2026.
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The math behind the home equity loan to pay off mortgage strategy
Why would anyone do this? Usually, it's about the "spread." If you bought your home when rates were high, or if you have a variable rate that’s currently screaming upward, a fixed-rate home equity loan might look like a life raft.
Think about it.
Standard mortgages are amortized over 30 years. In the beginning, you’re mostly paying interest. If you’ve already been in your home for 15 years, you’ve finally started hacking away at the actual principal. If you take out a home equity loan to pay off mortgage debt at that point, you’re essentially starting a new loan. Even if the interest rate is slightly lower, you need to look at the total "cost of carry."
When the numbers actually work
I talked to a homeowner recently who had a private mortgage with a nasty 8% interest rate from a smaller lender. They had enough equity to cover the remaining $120,000 balance. By securing a home equity loan at 6.5%, they didn't just lower the monthly payment; they chopped years off the back end because they kept their monthly payment the same as the old one.
That's the trick.
If you lower your rate but also lower your payment and take longer to pay it off, you lose. To win, you have to keep the pressure on the principal.
The "Closing Cost" Trap
Don't forget that banks aren't charities. Transitioning to a home equity loan to pay off mortgage obligations involves closing costs. We are talking about appraisals, origination fees, and title searches. Often, these run between 2% and 5% of the loan amount. If you owe $200,000, you might be looking at $6,000 in fees just to change the name of your debt. If your interest savings only amount to $50 a month, it’ll take you 120 months—ten years—just to break even.
That is a long time to wait for a "win."
Is it a "Second Mortgage" or a "New First"?
Technically, if you use the HEL to pay off the original loan completely, the HEL becomes your primary lien. This matters for your credit score and for how lenders view you.
- Fixed Rates: Most home equity loans are fixed. This is great for stability.
- Lump Sums: You get the cash all at once, pay off the old servicer, and then you’re done with them.
- The HELOC Difference: Don't confuse this with a Home Equity Line of Credit. A HELOC is like a credit card attached to your house. Using a HELOC to pay off a mortgage is incredibly risky because the rates are almost always variable. If the Fed hikes rates, your "smart move" turns into a financial nightmare.
The 80% Rule and Your Safety Net
Lenders generally won't let you borrow more than 80% of your home's value (LTV). If your home is worth $500,000, and you owe $350,000, you have $150,000 in equity. But you can't touch all of it. The bank wants a cushion.
They’ll usually cap your total debt at $400,000 (80% of $500k). Since you already owe $350k, you can only get a $50,000 loan. That obviously won't pay off your mortgage. To use a home equity loan to pay off mortgage debt in full, you basically need to owe less than 70-75% of what the house is worth today.
Honestly, the best candidates for this are people who are very close to the finish line. Maybe you have $80,000 left on a mortgage that has some weird terms or a high rate, and your house is worth $400,000. In that case, the HEL is a surgical tool.
Tax Implications You Might Not Expect
Back in the day, you could deduct interest on home equity debt no matter what you used it for. Those days are gone. According to the IRS, you can only deduct the interest if the loan is used to "buy, build, or substantially improve" the home that secures the loan.
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If you use a home equity loan to pay off mortgage debt, does that count?
Generally, yes, because you are essentially refinancing the original "acquisition indebtedness." But—and this is a big "but"—if you take out extra cash to pay off credit cards or buy a boat, that portion of the interest isn't deductible. You have to track the money. It's boring, but it saves you from an audit headache later.
Why some experts say "Don't do it"
There is a psychological component to debt that spreadsheets don't capture. Your primary mortgage is a very protected type of debt. In many states, there are extensive protections against foreclosure for primary mortgages.
When you start moving things around into home equity products, you might be dealing with different terms. Also, some people use a home equity loan to pay off mortgage debt just so they can "feel" like the mortgage is gone, but the house is still at risk. If you can't pay the HEL, the bank takes the house just as fast as they would with a regular mortgage.
Actually, sometimes faster.
Smaller banks or credit unions that hold these loans may have less robust "loss mitigation" departments than the giant mortgage servicers like Rocket or Chase. If you hit a rough patch, you might find your local bank is less willing to do a "loan modification" than a massive servicer would be.
The Strategy: How to execute this properly
If you've crunched the numbers and decided to move forward, don't just walk into your current bank.
- Shop the Credit Unions: They often have the lowest rates for equity products because they are member-owned.
- Check the "Release of Lien": Ensure that once the HEL funds are sent to your old mortgage company, they actually record the release of the original lien. If they don't, your title will be a mess.
- Compare to a Refinance: A traditional "Rate and Term" refinance is the rival to this strategy. Usually, refis have lower interest rates than home equity loans, but higher closing costs. If your loan balance is small (under $100k), the HEL is usually cheaper because of the lower fees. If your balance is huge ($300k+), a traditional refinance is almost always the better play.
The "Hidden" Benefit of the Home Equity Loan
One thing people rarely talk about is the flexibility of the term. A standard mortgage is 15 or 30 years. Home equity loans can often be found in 5, 10, or 20-year flavors.
If you have 12 years left on your mortgage and you use a home equity loan to pay off mortgage debt by taking a 10-year HEL, you have just forced yourself into a shorter payoff window. It’s like a commitment device for your finances. You’re forced to be aggressive.
Real-world scenario
Take Sarah. She had 18 years left on her 4.5% mortgage. She owed $90,000. Her monthly payment was fine, but she hated the interest she was bleeding. She found a credit union offering a 10-year home equity loan at 5.2%. Wait—the rate is higher? Yes. But because she shortened the term from 18 years to 10, she ended up paying significantly less in total interest over the life of the debt. She paid a bit more per month, but she'll own the home free and clear 8 years sooner.
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That's the kind of nuance that gets lost in "lower rate is always better" talk. It’s about the total interest paid from today until the day the balance hits zero.
Actionable Steps to Take Right Now
If you're leaning toward using a home equity loan to pay off mortgage debt, don't guess. Do this:
- Get your "Payoff Statement": Call your current mortgage servicer and ask for a formal payoff amount. It's usually a bit higher than your current balance because of per-diem interest.
- Check your LTV: Look at recent sales in your neighborhood on Zillow or Redfin. Take 80% of that number. If your payoff amount is higher than that 80% figure, stop here. You won't qualify.
- Calculate the Break-Even: Add up the closing costs of the new loan. Divide that by the monthly interest you'll save. If it takes more than 36 months to break even, it’s probably not worth the hassle unless you plan on staying in the house for the next decade.
- Ask about "No-Cost" Options: Some lenders offer home equity loans with no closing costs in exchange for a slightly higher interest rate. If you plan on paying the house off very quickly (in 2 or 3 years), this is almost always a better deal than paying $5,000 upfront for a lower rate.
Moving your debt around can feel like progress, but it only counts if it actually keeps more money in your pocket or shortens your sentence with the bank. Be cold-blooded with the math. Banks certainly are.