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Home Equity Line Of Credit Payoff Calculator

Refinancing your HELOC into a home equity loan

HELOC payments tend to get more expensive over time. There are two reasons for this: adjustable rates and entering the repayment phase of the loan.

HELOCs are variable-rate loans, which means your interest rate will adjust periodically. In a rising-rate environment, this could mean larger monthly payments.

Additionally, once the draw period ends borrowers are responsible for both the principal and interest. This steep rise in the monthly HELOC payment can be a shock to borrowers who were making interest-only payments for the first 10 or 15 years. Sometimes the new HELOC payment can double or even triple what the borrower was paying for the last decade.

To save money, borrowers can refinance their HELOC. Here we’ll take a look at two options and how they work.

  • Home Equity Loan - You can take out a home equity loan, which has a fixed rate, and use this new loan to pay off the HELOC. The advantage of doing this is that you could dodge those rate adjustments. The disadvantage is that you would be responsible for paying closing costs.
  • New HELOC - Apply for a new HELOC to replace the old one. This allows you to avoid that principal and interest payment while keeping your line of credit open. If you have improved your credit since you got the first HELOC, you might even qualify for a lower interest rate.

If you’re interested in refinancing with a HELOC or home equity loan, use Bankrate’s home equity loan rates table to see current rates.

Home equity loans vs. HELOCs

Home equity loans and HELOCs are two types of loans that use the value of your house as collateral. They’re both considered second mortgages. The main difference between them is that with home equity loans you get one lump sum of money whereas HELOCs are lines of credit that you can draw from as needed.

HELOC vs. mortgage refinance

A HELOC isn’t the only way to tap your home equity for cash. You also can use a cash-out refinance to raise money for renovations or other uses. A cash-out refi replaces your existing mortgage with a new mortgage that’s larger than your current outstanding balance. You receive the difference in a lump sum of cash when the new loan closes.

In 2021, when mortgage rates were at record lows, the smart move was to take a cash-out refi and lock in a super-low rate. Because mortgage rates have doubled in 2022, a cash-out refi is no longer necessarily the best idea. If you locked in a mortgage rate of 3 percent, for instance, a new cash-out refinance now likely won’t make sense.

A HELOC can be a good choice if you’re happy with the terms of your existing mortgage and don’t want a new mortgage. A HELOC also tends to come with fewer fees and closing costs than a cash-out refi.

Paying off a HELOC

HELOCs are different from home equity loans in that they function more like a credit card. Your lender will extend credit, based on several factors including your credit history and the equity in your house. You only owe what you borrow. For example, if you’re extended $50,000 and use just $25,000, then you only owe $25,000.

Many HELOCs allow borrowers to make interest only payments during the draw period, which can vary. Normally, draw periods last between 10 and 15 years. When that period ends, you must make principal and interest payments.

HELOCs can become a drain on your finances if you put off making payments on the principal. If possible, make extra monthly payments on your principal. Like home equity loans, find out if there are prepayment penalties.

How do HELOCs work?

A HELOC is a revolving, open line of credit. It works much like a credit card — you are able to use it as needed. However, a HELOC has some benefits over credit cards. One is that the balance on your HELOC is likely to be higher than your credit card balance. Another is that HELOCs currently have single-digit interest rates, compared to the 16 percent or more you’ll pay if you carry a balance on a credit card.

HELOCs generally have a variable interest rate and an initial draw period that can last as long as 10 years. During that time, you make interest-only payments. Once the draw period ends, there’s a repayment period, when interest and principal must be paid.

A word of caution: With a line of credit, it can be easy to get in over your head by using more money than you are prepared to pay back. The variable payments can also create a financial challenge in the future.

What are HELOCs used for?

You can use the proceeds from your HELOC for anything. That’s a lot of financial freedom, so it’s useful to have some guidelines about how to spend the money. A few options, and whether they make sense:

  • Home improvements and repairs: Yes. Using home equity to pay for kitchen renovations and bathroom updates is a no-brainer. These upgrades add to functionality and (generally) the resale value of your home. If you need a new air conditioner, for example, a HELOC is cheaper than carrying a credit card balance. However, be careful about using HELOCs to add a swimming pool or tennis court — these additions are expensive, and homeowners usually don’t recoup the full amount of the investment.
  • Consolidating debt: Maybe. If you’re carrying credit card debt and paying double-digit interest rates, it could make sense to swap out expensive revolving debt for cheaper HELOC debt. This strategy comes with a big caveat, however: Pull cash out of your house to pay off the credit cards only if you’re not going to simply run up more debt. Otherwise, you’ll have the unfortunate combination of less home equity and an overhang of credit card balances.
  • Investing: Probably not. Tapping home equity at 3 percent to fatten up your retirement savings made sense. However, using a home equity line of credit at 7.5 percent today probably isn’t ideal.
  • Paying down student loans: Maybe. This one is a bit of a gray area. If you owe student loans from private lenders, it can make sense to pay those down by tapping home equity. In contrast to federal loans, private student loans carry higher rates and less flexibility. Federal loans have lower rates and more safeguards around financial hardships, so there’s no hurry to pay them down.
  • Going on vacation or buying electronics: Hard no. Real estate is a long-lived asset that will give you years of use and almost certainly gain value. A Caribbean cruise or a gaming console, on the other hand, will be long forgotten even if you’re paying it off for decades. If a HELOC is your only option for paying for a vacation or another big-ticket item, better to put the purchase on hold.

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