Should I pay off my mortgage with my HELOC?

Question

Considering the potential fallout from the COVID-19 crisis, I am considering paying off my mortgage with my HELOC.

My mortgage only has 3 years left on it and the interest rate is a fantastic 2.6%. The payoff amount for the mortgage would be around $86,000 and the current monthly payment (Principal + Interest) is around $2300.

My HELOC currently has no balance whatsoever, and has about a $230k credit limit with a 4.49% interest rate.

If I were to take $86k from the HELOC to pay off the mortgage, I believe the monthly payment (interest only) would be around $436 per month.

My current job is stable for the moment, and I do have some cash reserves.

I do understand that a 2.6% interest rate is much better than a 4.5% interest rate, however my reasons for considering this is in the event I lose my job or some other financial calamity that may occur. I'm concerned that banks may start freezing HELOCs if the housing market gets hit hard by this pandemic.

My thought is to pay the monthly interest on the HELOC ($436) and add an additional payment equivalent to the principal payment from the former mortgage.

So, what do you guys think, is this a stupid idea?

Kerry Baird · Answer

I wouldn’t pay that off.

Josh Bakhshi · Answer

Dan,

It's not a stupid idea.  I still remember 2006-8 when HELOCs were frozen.  I understand where you are coming from and it makes sense.  But from what you said, I wouldn't do it.  Thank goodness you have a job still.  Congrats!  That means that you can afford the payments.  You only have 3 years to go so you are in good shape and you have reserves.

Personally, I would hold off and see if there are ways to make more than 4.5% on some investments.  I am betting that in 3-6 months, there will be a ton of opportunities and you would be glad you had 230K to make some real money.

Good luck