Extra $500 a Month: Should You Pay Down Your Mortgage or Your HELOC First?

The Question Underneath "Which Loan First"

$500 a month is $6,000 a year and $30,000 over five years. Set against a $300,000 first mortgage and a $60,000 home equity line, that $30,000 retires half the line or a tenth of the mortgage, and the choice between those two outcomes is the question most homeowners ask. The stated question is which loan gets the money. The question underneath it is what the money is supposed to accomplish.

If you ask why you want to pay either loan down, the answer is almost always the same pair of goals: pay the least total interest across both debts, and keep enough flexibility to handle whatever the next five years bring. Those two goals are measured in different units. The first is measured in interest dollars avoided. The second is measured in cash you can reach in a bad month. Both are knowable numbers, and each one gets a figure in the sections that follow.

A HELOC is a second mortgage in the plain sense of the term, a second lien on the same house that sits behind the first. The CFPB describes it as an open-end line of credit you can borrow against repeatedly during a draw period, often 10 years, before a repayment period that often runs 10 or 20 years, and it usually carries a variable rate. The Mortgage Bankers Association's newsroom carried the most recent ICE Mortgage Monitor figure on how much equity is behind those lines: $11.7 trillion in tappable equity held by mortgage holders. That's a national total rather than any one household's figure, and it suggests how many households have equity a line could sit against.

Over seventeen years on the executive side of this industry, the restructuring and consolidation files that have reached my desk share a pattern: the household had spent years sending extra money to the larger balance because it was the larger balance. At AmeriSave, a restructuring review starts with both rates written side by side, and the analysis below follows the same order.

Why the HELOC Is Usually the Higher-Rate Lien

If your first mortgage is a fixed-rate loan, its rate is a single number printed on your note and it doesn't move. A HELOC rate is built differently, and the difference is written into federal regulation rather than left to lender preference. Regulation Z's home equity plan rules, at 12 CFR 1026.40(f)(1), permit a lender to change the annual percentage rate on a line only when the change is based on an index that's available to the general public and outside the lender's control. The lender adds a margin on top of that index. A common index is the bank prime loan rate, and the margin is the lender's own number, set at origination and disclosed in your agreement.

The Federal Reserve's most recent H.15 release put the bank prime loan rate at 6.75%. Freddie Mac's most recent weekly Primary Mortgage Market Survey put the average 30-year fixed rate at 6.76% and the average 15-year fixed rate at 6.09%. Set those figures side by side and the structural point is visible before any margin is added. The index a HELOC is priced from already sits within one basis point of the average rate on a new 30-year fixed loan. Add a positive margin and the line prices above a new first mortgage. If you're carrying a first mortgage from a lower-rate period, the gap is wider still. Your own margin is in your agreement, and it's the number to check, since no public source publishes a market-wide typical margin.

That structure means the rate exposure on a HELOC balance is structural rather than incidental. Every dollar left on the line is repriced whenever the index moves, in either direction, for as long as the balance stands. Every dollar you remove from the line leaves that exposure behind. A paydown on the fixed first mortgage saves interest at a known rate and removes no rate risk, because there was none to remove. A paydown on the line saves interest at a higher rate and removes exposure at the same time. This explains why the allocation question tilts toward the HELOC even before the arithmetic runs.

The CFPB has described two basic approaches to extra debt payments. The first sends extra money to the debt with the highest interest rate, because that debt is costing the most, and it minimizes total interest paid. The second sends extra money to the smallest balance first, the approach usually called the snowball, which the CFPB frames as a motivation strategy rather than a cost strategy. The highest-rate approach has picked up the popular label "avalanche method," a term the CFPB itself doesn't use, and applied to a first mortgage and a HELOC it points at the line in most households. The snowball happens to point the same direction here, since a $60,000 line is the smaller balance beside a $300,000 mortgage. When both methods agree, the decision is settled on strategy grounds, and the remaining work is measuring the size of the advantage.

$500 a Month for Five Years: The Wide-Gap Case

Every balance and rate in this example is illustrative, chosen to show the mechanism rather than to describe AmeriSave's pricing or yours. Actual HELOC and mortgage pricing depends on your credit profile, your combined loan-to-value, the lender, and market conditions, and a personalized quote is the only basis for a real plan.

Assume a $300,000 first mortgage at 3.25% with 300 months remaining. A household that financed or refinanced during a lower-rate period fits that description, and its principal and interest payment is $1,462 a month. Assume a $60,000 HELOC balance at 8.5%, still in its draw period with an interest-only minimum. The 8.5% is the 6.75% prime rate plus an illustrative 1.75-point margin. Interest on $60,000 at 8.5% is $5,100 a year, or $425 a month, and that $425 is the minimum payment. The gap between the two liens is 5.25 points.

Send the $500 to the line each month on top of the interest, and the balance falls by $500 a month: $60,000 becomes $30,000 at month 60. Interest over those 60 months totals $19,231, against $25,500 if the line had sat at its interest-only minimum the whole time, since $425 times 60 months is $25,500. The paydown avoids $6,269 of interest. On top of that, the required payment falls with the balance. By month 60, interest on the remaining $30,000 runs $212.50 a month, so the minimum has been cut in half and $212.50 of monthly cash flow has been freed without changing anything else in the budget.

Send the same $500 to the first mortgage instead and the payment becomes $1,962. Over 60 months the loan collects $42,940 of interest against $45,467 on the original schedule, so the extra payments avoid $2,527. The balance at month 60 is $225,223 against $257,750 on the untouched schedule, a difference of $32,527. That figure is the $30,000 you sent plus the $2,527 of interest it displaced. That's a real result and a permanent one, but the required payment is still $1,462 at month 60, and the line still owes the full $60,000 at $425 a month.

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The difference between the two paths over five years is $3,741, and it comes from the rate gap. Each $500 sent to the line stops accruing interest at 8.5%; the same $500 sent to the mortgage stops accruing at 3.25%. The gap on each dollar is 5.25 points a year, and because the paydown builds by $500 a month rather than landing all at once, the average amount working during the period is roughly half the $30,000 total. Roughly $15,000 at a 5.25-point gap over five years is on the order of $3,900, and the exact amortized figure is $3,741.

The Same $500 at a Gap of Just Under Two Points

A 5.25-point gap overstates the typical case, so run it again at a gap closer to what a recently financed household would face. Hold the $300,000 first mortgage but price it at 6.76%, the average 30-year fixed rate in the most recent Freddie Mac survey, with a full 360 months remaining. The payment is $1,948. Price the $60,000 line at 8.75%, the 6.75% prime rate plus an illustrative 2-point margin, with an interest-only minimum of $437.50. The gap is 1.99 points.

Over 60 months, the $500 sent to the line avoids $6,453 of interest, and the same $500 sent to the mortgage avoids $5,575. The advantage narrows from $3,741 to $878, a drop of roughly three quarters. The direction holds while the size of the edge falls, which is the shape to expect: the advantage of paying the HELOC first scales with the gap, and a gap under two points leaves the decision close enough that the secondary factors below carry real weight. At the same time, the line still owes $60,000 on the mortgage-first path, and it still owes it at a variable rate.

Both examples measure a five-year window, and a five-year window understates the mortgage's case, since the mortgage has 300 or 360 months to compound its savings while the line only has the balance in front of it. The fair comparison runs both debts to zero on an identical budget. The next section does that.

What Order Does to the Full Payoff

Fix the household's total monthly outlay and hold it constant until both liens are gone. In the wide-gap case that budget is $2,387 a month: the $1,462 mortgage payment, the $425 line minimum, and the $500 extra. The only variable is which lien gets the extra first, with the full payment rolling to the survivor once the first lien clears.

Pay the line first and it clears after roughly 87 payments. That's how long $925 a month takes to retire $60,000 at 8.5%. The $925 that had been going to the line then joins the mortgage payment, and the mortgage clears at month 203. Total interest across both debts is $123,444.

Pay the mortgage first and the line sits at its interest-only minimum through the rest of a 60-month draw period, then moves into a repayment period. Amortized over 20 years at 8.5%, which falls within the repayment lengths the CFPB describes as common, the required payment steps up from $425 to $521. The mortgage clears first and its payment then rolls to the line, and both debts are gone at month 223. Total interest is $170,217.

Same budget, same two loans, and a gap of $46,773 in interest and 20 months of payments. That gap exists because the mortgage-first path leaves $60,000 accruing at 8.5% for five years and then amortizes it slowly at the same rate, while the HELOC-first path retires the 8.5% money first and puts every later dollar against 3.25% money. Rerun the sequence at the narrow gap and the HELOC-first path clears both debts at month 221 against month 230, with $26,267 less interest. Strip the rate gap out entirely and price both liens at the same rate, and the two orders finish in the same month with the same total interest to the dollar. The entire difference in every example above is the rate gap.

The repayment-period step-up deserves its own line. A $60,000 balance at 8.5% amortized over 20 years requires $521 a month; over 10 years it requires $744. Either figure replaces a $425 minimum on a date already written into your agreement, and if the index has risen by then, the step is larger. Retiring the balance during the draw period takes that scheduled increase off the calendar while you still control the timing.

The Case for the Mortgage, Stated Fairly

Any recommendation I'd put in writing has to carry the other side, and mortgage-first has a real one. A fixed first mortgage rate can't move against you while you pay it down, so every dollar of interest the mortgage path avoids is locked at the moment you send it. The HELOC path saves 8.5% only while the index holds; if prime falls, the saving falls with it, though the balance you retired stays retired. The mortgage saving is smaller in the near term and more certain over the long one, and if you weight certainty heavily, that's a legitimate input to the decision.

Three situations reverse the default on the arithmetic itself. The first is a line whose current rate sits below your first mortgage rate. Confirm that on your own statement rather than assuming it in either direction. The second is a prepayment penalty or early-closure fee on the line large enough to consume the interest you'd avoid. The third is a household with no cash reserve at all. The liquidity section takes that case up. In each case the rule is unchanged: send the money to the lien that costs more once every term is counted. The rule keys off the number, and the label on the lien has no bearing.

The argument that fails is the one that sends the money to the mortgage because the mortgage is the larger balance. Balance size determines how much total interest a loan generates over its life. Rate determines how much each additional dollar of paydown saves. Only the second question is being asked when you decide where $500 goes. A related instinct is to refinance the first mortgage and absorb the line into it. That's the restructuring conversation our team at AmeriSave has most often, and with a 3.25% first mortgage it usually fails the math. Moving $300,000 from 3.25% to a rate near the most recent 6.76% average adds roughly $10,500 a year in interest, against $5,100 a year on the entire line at 8.5%. With a first mortgage already priced near current rates, the consolidation math can work, and it's worth running as its own question.

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The Liquidity Exception and Where It Stops

The exception that survives scrutiny is liquidity. A dollar sent to the first mortgage is locked in the house until you sell, refinance, or borrow against it again. A dollar sent to a HELOC during the draw period restores a dollar of available credit, because the CFPB describes the line as revolving credit you can borrow against repeatedly up to your limit. Assume the illustrative line has a $100,000 limit. A $60,000 balance leaves $40,000 open, and 60 months of $500 payments raise the open room to $70,000. If you're a household with no emergency savings apart from the line, that difference is a second reason the line wins, and for some households it's the more important one.

The caveat belongs beside the exception. The same CFPB explainer confirms that if your home's value drops significantly, or if your financial circumstances change, the lender may refuse further draws or freeze the line. Those two triggers cluster in exactly the conditions where you'd reach for the reserve: a regional price decline or a loss of income. A paid-down line is therefore a conditional reserve. It's real credit today, and it can be reduced or frozen on the day you need it most. That makes it a different asset from cash in an account.

That produces the one place where the answer changes. If the line is your only liquidity, pay it down to a floor you've set in advance, then stop and redirect the $500 into cash savings until an actual reserve exists, then resume. In the wide-gap example, paying the line from $60,000 to $30,000 and pausing there captures $6,269 of avoided interest over five years while leaving $70,000 of headroom on the line. The rule is a floor and a pause rather than a blanket case for paying the mortgage first. When homeowners carrying both liens and no cash cushion reach AmeriSave for a restructuring review, the cash-reserve question comes before any recommendation does.

Taxes Usually Widen the Gap

The tax rules tend to widen the effective gap rather than close it. IRS Publication 936 allows a deduction for home mortgage interest only on debt used to buy, build, or substantially improve the home that secures it, with a combined acquisition-debt limit under the current rules of $750,000, or $375,000 if you're married filing separately, and only if you itemize. A first mortgage used to buy the house meets the use-of-proceeds test. A HELOC drawn to consolidate credit cards, cover tuition, or pay a medical bill doesn't, and the IRS rule is explicit that interest isn't deductible to the extent the proceeds weren't used for the home, regardless of when the debt was taken on.

That means a household whose HELOC funded debt consolidation is paying non-deductible interest at the higher rate and potentially deductible interest at the lower rate. Measured after tax, the line sits even further above the mortgage than the two note rates suggest. A HELOC used for a kitchen renovation may qualify. In that case the after-tax gap narrows back toward the pre-tax figure. Paying down principal faster changes none of this, because the original use of the money fixed which portion qualifies. Tax outcomes depend on your full return, and the treatment of both liens is a question for a tax professional before it enters the allocation decision.

Before the First Extra Payment

Three items belong on the checklist before the money moves, and both notes come first. The CFPB defines a prepayment penalty as a fee some lenders charge for paying off all or part of a mortgage early, and confirms that not all mortgages carry one. The only way to know about yours is to read the note or ask the servicer. The CFPB's HELOC explainer notes that lenders can charge fees on a line, and your agreement is the place to find out whether closing or paying down early triggers one. A fee larger than the interest you'd avoid changes the destination, and it changes it on arithmetic alone.

Next comes how the extra is applied. Extra principal on a standard amortizing mortgage shortens the term and leaves the scheduled payment unchanged, so tell your servicer in writing that the extra is to be applied to principal, and confirm it on the next statement. On the line, confirm that a payment above the interest-only minimum reduces principal. Revolving credit works that way by design, and it's still worth one call. The last item is the two rates written side by side with the two balances under them. We ask for both statements at AmeriSave before any restructuring recommendation goes out, because the decision usually takes one line of arithmetic once those four numbers are visible.

The Bottom Line

The allocation question is a rate-gap question first and a liquidity question second, and both parts are measurable. In the illustrative wide-gap case, $500 a month to the HELOC avoided $6,269 of interest in five years against $2,527 on the mortgage, and the full payoff sequence finished 20 months sooner with $46,773 less interest. At a gap just under two points the five-year edge fell to $878 and the sequence advantage to $26,267, and the direction never changed. The one exception is a household whose line is its only reserve, and even there the answer is a floor and a pause, with the caveat that the lender can restrict the line under the conditions the CFPB describes.

I've watched this decision get made in both directions for seventeen years, and the households that came out ahead were the ones that wrote down two rates before they wrote a check. Pull both statements this week, read both notes for prepayment terms, and decide the cash floor you need before the paydown starts. Twelve months from now you'll have sent $6,000 somewhere deliberate, and if the math above holds for your two liens, you'll have a smaller variable-rate balance and a clear and defensible reason for every dollar of it. At AmeriSave that's the standard restructuring advice has to meet: the math works or it doesn't, and it should be visible before anyone commits.