If you have a home equity line of credit (HELOC), it may be possible to refinance the loan if needed. Depending on your financial situation, refinancing may give you more time to repay the loan or help you get better terms, such as a lower monthly payment or interest rate.
HELOCs are often used to help pay for things like remodeling projects or emergency expenses. A HELOC works a bit like a credit card during its draw period, which is typically five to 10 years. During that time, you can borrow money up to the approved credit limit, while only being required to make interest payments.
Once the draw period ends, the HELOC’s repayment period begins. At that point, your monthly payments will usually be significantly higher, since they will include both principal and interest. Luckily, there are several options for refinancing a HELOC and making the immediate payments more affordable. Read on to learn about options for refinancing or restructuring the terms of your HELOC.
Why should I consider refinancing my HELOC?
When a HELOC’s repayment period starts, you must start paying back the money you borrowed, plus the interest. Typically, HELOCs have variable interest rates that change over time. Since the monthly payments will likely be much higher than what you paid during the draw period, you might be worried about how they’ll impact your budget. If your scheduled repayments don’t fit well with your financial situation, you may want to consider whether or not to refinance the HELOC.
Replacing your existing HELOC with a new HELOC, a home equity loan, or a cash-out refinancing may provide an opportunity for you to change the length of the repayment period, lower your interest rate, or reduce your monthly payments to make them more affordable.
HELOCs have different repayment schedules. Sometimes the minimum monthly payments are set low enough that they don’t repay the entire balance by the end of the repayment period. At that point, you’ll have to pay the balance in a lump sum, called a “balloon payment.” If you can’t afford your balloon payment, refinancing might be one way to avoid defaulting on the loan.
On the other hand, if home values in your area have gone up recently, a refinancing might allow you to get a higher credit limit on a new HELOC.
How to qualify for a HELOC refinance
The refinancing process on a HELOC is similar to your original mortgage approval process. To approve your HELOC refinancing, your lender will consider your current income, assets, credit score, other debts, and current property value. If your credit score has improved since the original HELOC, you might qualify for a lower interest rate. Of course, the reverse is also true.
If housing prices have risen in your area, your home equity might have increased substantially, too. That would likely make the lender more comfortable with refinancing your HELOC and providing you with more favorable terms. But if your home value has decreased, you might have a hard time getting approved for a refinancing of your HELOC.
Can you refinance a HELOC with a mortgage?
If you’ve built up a substantial amount of home equity over the years, refinancing your mortgage may be a good option for repaying your HELOC. A cash-out refinance means that you refinance a larger amount than what you owe on the original mortgage and get the difference as a cash payment. With a cash-out refi, you can use the money you take out for any purpose, including paying off your existing HELOC.
Of course, it’s not a good idea to tap home equity as a source of easy cash for a new car or a vacation. Using some of the home equity you’ve accrued will extend the amount of time it will ultimately take you to pay off your house. Think carefully before using your house to secure any loan, including a new HELOC.
Can you refinance a HELOC with a home equity loan?
A home equity loan is another possible source of funds for paying off a HELOC balance. You can generally borrow up to 85% of the equity you’ve built up in your home through a home equity loan, and this might be a good option, especially if you want to switch your variable-rate HELOC to a fixed-rate loan. If you’re facing a large balloon payment on a HELOC, a home equity loan is another way to pay it off.
Home equity loans, like HELOCs, are secured on your property. As such, they tend to have lower interest rates than credit cards or unsecured personal loans. They still come with the risk that if you can’t make the loan payments, you could face foreclosure.
Can you replace your HELOC with a new HELOC?
There are a few ways to replace or restructure your HELOC and get a new HELOC. The simplest option, which might be the best to try first, is simply to ask the lender for a modification or refinancing. The lender might be willing to reduce the interest rate, refinance your remaining balance, or offer you a new HELOC — especially if your income or property value has increased.
If you’ve been a customer in good standing, ask if your existing lender would be willing to extend your repayment time or waive some of the application or closing costs on a new HELOC. However, it’s possible that your lender will decline and insist that you stick with the repayment schedule you agreed to. In that case, you’re free to shop around for a HELOC with another lender.
Again, be wary of getting caught in a bad cycle of refinancing a HELOC over and over again. It’s always best to have a well-thought-out plan for fully repaying the credit line — not just making the minimum payments — to avoid possibly putting your home in jeopardy.
Contact your local Finance of America Mortgage Advisor today to learn more about how to refinance a HELOC.