A Home Equity Line of Credit (HELOC) is a type of loan that allows you to borrow against the equity in your home.
HELOCs are set up as a revolving line of credit, so you can borrow and repay money as needed until your loan reaches the end of its draw period. Then you need to start repaying the loan. These loans are popular because they typically have low interest rates.
However, you may find you want to refinance your HELOC, such as if the variable interest rate increases. So, let's learn more about your refinancing options and how they can help you secure better terms.
- You can borrow against the equity in your home with a HELOC loan. You can take out money any time during the draw period and only pay interest until the repayment period begins.
- While you can use funds from a HELOC for anything you’d like, this type of loan typically comes with a variable interest rate. So over time, your rates and payments could change.
- Refinancing options, such as locked interest rates, are available for HELOCs to help you get more favorable terms and help you save money.
Refinancing Options for Your HELOC
Refinancing is when you take out a new loan to replace an existing one. While you often hear this term associated with first mortgages, you can also refinance other loans, such as a HELOC.
You can either work with your original lender to create a new loan, or you can shop around and find better terms somewhere else. Either way, you'll need to give the bank some information. You'll typically need to provide a new lender with:
- Your current loan balance
- A current appraisal of your home’s current value
- Your credit score
- Proof of income and your employment history
- A list of other debts you may have
Based on this information, a new lender will give you a quote for the terms and conditions of your loan. You can then compare those terms to your existing loan’s terms and decide if it’s worth refinancing.
You can only refinance your HELOC if there’s enough equity in your home. If you owe more on your home than it’s worth, you won’t qualify for this type of refinancing.
You can refinance your HELOC in several ways:
Modify Your HELOC
If you don’t want to take out a new loan, you may want to consider a modification. This is when your lender agrees to change the terms of your loan, such as the interest rate, monthly payment, or length of the loan.
Modifying your loan can give you more time to pay it off. Additionally, your lender might agree to lock in your interest rate so it won’t increase.
Some banks may not allow you to make modifications to your loan unless you’re having trouble making the payments. You may need to provide proof of financial hardship before your request is approved.
While modifying your home equity line of credit can improve your terms, lenders don’t have to approve your request. If your bank declines your application or if you want an alternative to refinancing your HELOC, you have other options, from taking out a new HELOC to refinancing your mortgage.
Take Out a New HELOC
You can refinance your HELOC by applying for a new home equity line of credit with your current lender or another bank. The process is similar to opening a HELOC for the first time.
You'll need to fill out an application and provide information about your home’s equity, credit score, employment, and income. After your application is approved, you can use your new loan to pay off your existing HELOC.
One advantage of this option is that you might be able to get a better interest rate on your new loan or negotiate a longer draw period. This extends the amount of time you have to repay the loan.
But there are downsides to consider. For instance, if you extend the repayment period, you’ll likely end up with a higher monthly payment when your new draw period is over.
Take Out a Home Equity Loan to Pay Off Your HELOC
If you don’t want the variable interest rate that comes with your HELOC, consider taking out a regular home equity loan. This is a lump-sum payment that you can use however you'd like, including paying off your HELOC.
Often banks limit you to 80% of your home’s equity for these types of loans. So you’ll have to make sure you have built up enough equity to qualify.
With a home equity loan, you'll get a fixed interest rate for the life of the loan. Under these terms, your monthly payment would stay the same until you pay it off. This consistency can make it easier to budget.
Refinance Your HELOC Into Your Original Mortgage
When you have both a home equity line of credit and a mortgage, you make two monthly payments. If you want to make one payment, you can refinance your current mortgage and HELOC into a new mortgage, which could also help lower your monthly payment.
A cash-out refinance is when you take out cash with your mortgage to pay off your HELOC. So, you’re cashing out the equity of your home and using that money.
You might want to consider refinancing your mortgage if interest rates have declined. If you can secure a lower interest rate on your new loan, you can save money over the life of the loan. However, there are some downsides to consider with a cash-out refinance, such as the fact that you’ll have to pay closing costs, which can average $5,000.
Keep in mind that if you reduce your home’s equity to less than 20%, you’ll likely need to get private mortgage insurance (PMI). If you didn’t need PMI before the cash-out, you’ll have its cost added to your monthly payment.
How Are HELOC Refinance Rates Determined?
When you refinance your HELOC, your lender calculates an interest rate to offer you by evaluating several factors, including:
- Your credit score
- The value of your home
- The amount of equity you have in your home
- Current market conditions
If you have a good credit score and a lot of equity in your home, you're likely to get a lower interest rate. But if general market conditions aren’t favorable, you might end up paying a higher rate.
HELOCs usually have variable interest, which means your rate changes over time. It’s calculated by using an index, such as the U.S. Prime Rate, which changes, and a margin, which is added to the index and does not change.
Alternatives to HELOC Refinancing
If you're not sure whether refinancing your HELOC is right for you, consider some other options. You might be able to get a lower interest rate by:
Take Out a Personal Loan
In some cases, such as if your HELOC balance is fairly low, you might be able to take out a personal loan to pay it off. These loans typically have fixed interest rates, which can provide predictability. However, their interest rates are typically higher than rates on HELOCs.
Many banks cap their personal loans to between $50,000 and $100,000. If you have a larger HELOC balance, this option might not be a good fit for you.
If you don't have good credit, it can be difficult to qualify for a personal loan. If you do qualify, you'll likely have to pay origination fees. Finally, also consider any prepayment penalties or late-payment penalties with a personal loan.
Get Credit Counseling
If you're struggling to make your HELOC payments, you can pursue debt relief options such as credit counseling organizations.
Through these programs, you can work with a credit counselor to come up with a plan to pay off your debts. This can help you get out from under a high-interest HELOC and potentially improve your credit score.
Transfer Your Balance to a 0% Interest Credit Card
If you have good credit, you might be able to transfer your HELOC balance to a new credit card that offers 0% interest for a promotional period. However, this strategy carries significant risk.
While shifting your debt to an interest-free credit card can give you some time to pay off your debt without accruing any additional interest charges, the 0% terms are not permanent. Be sure you’re fully prepared to pay off the card by the time the no-interest period ends, or you’ll likely face significantly higher interest rates than your HELOC rates.
Be sure you fully understand the terms of the credit offer before you sign up. Some cards charge a balance transfer fee, and the promotional period might be shorter than you expect.
Frequently Asked Questions (FAQs)
What’s the difference between a cash-out refinance and a HELOC?
A cash-out refinance is when you refinance your mortgage for more than you owe and take the difference in cash. Also, using a cash-out strategy does carry the risk of foreclosure. It differs from a HELOC, which allows you to draw from an open credit line as needed.
How soon after refinancing can you get a HELOC?
If you've recently refinanced your home, you might not be able to get a HELOC right away. You'll need to build up enough equity in your home and have a good credit score to qualify. Additionally, some banks may require you to wait a certain amount of time before opening another line of credit.
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