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When you take out a home equity line of credit (HELOC), you only pay interest until after the draw period. This means that after the draw period, you begin paying off your principal balance plus interest and your monthly total increases. If you are struggling with this added cost, refinancing your HELOC can make your payment more affordable. You can refinance your HELOC through several methods.
What is a HELOC and how does it work?
A home equity line of credit (HELOC) is a type of loan that allows you to borrow from the value of your home. Lenders may approve you for a certain line amount, which you can draw from as you would a credit card. During the draw period, which typically lasts around 10 years, you’re responsible for interest-only payments, although you can revolve your line of credit by making more substantial payments toward your principal.
If you’re repaying a HELOC, it may be smart to try to refinance it, especially if the draw period is coming to an end. After your draw period ends, you enter a 10- to 20-year repayment period, during which you’ll make payments on interest and the principal. At this point, you can no longer borrow money.
Unlike some other types of loans, a HELOC is secured, meaning it uses your home as collateral for the loan. This means that if you fall behind on payments, the lender may be able to foreclose on your home. However, because it is secured, a HELOC will often have a lower interest rate than something like a personal loan.
Homeowners who have equity in their homes often take out a HELOC to pay for emergencies, large purchases or even home renovations.
Why should I consider HELOC refinancing?
If you choose to pay only the interest on your HELOC instead of paying down a part or all of the principal during the first 10 years, you may be in for a huge shock when you reach the end of the draw period — especially if HELOC rates have risen since you first took out the loan.
If you think you won’t be able to manage the payment increase, or if you have some additional projects you’d like to fund, you can refinance your HELOC. Even if the new interest rate is higher than that of your original loan, this might be the best option for you because it could give you the extra time you need to repay the funds.
5 ways to refinance a HELOC
If you think that you may not be able to cover your monthly bill during the repayment period, there are a few ways to refinance your HELOC:
Talk to your lender
Some banks offer home equity assistance programs and will adjust your interest rate, loan period or monthly payments if you don’t think you will be able to afford the payments or have suffered some sort of financial hardship. If you have a good relationship with your lender, there’s a good chance they’ll work with you.
Get a new HELOC
While this may be delaying the inevitable, starting a new draw period may make the most sense for you. Be aware, however, that interest rates may rise, meaning you could pay even more money in the long run.
This option may make the most sense if you are young and have years to build more equity. If you’re nearing retirement and won’t be able to make your payments or want to avoid paying more in interest, it’s probably not a good idea.
Pay your HELOC off with a home equity loan
A home equity loan differs from a line of credit because you get the money in one lump sum. A fixed loan amount, a fixed interest rate and potentially a longer repayment period may make this an affordable option for you. Keep in mind that if you go this route, you may increase the amount you pay in interest.
Refinance your HELOC and mortgage into a new mortgage
Consider refinancing into a 15-year mortgage or 20-year mortgage to reduce total interest payments. While interest rates on primary mortgages could be favorable, you have to consider closing costs when you take this approach.
Unfortunately, this strategy is usually more complicated and involves a lot of paperwork. That’s why taking out a new mortgage to include your HELOC is generally only best if you can get a lower interest rate in doing so.
Get a personal loan
Not all lenders offer personal loans with high enough loan amounts to refinance a HELOC, but it may still be worth looking into. Personal loans have the benefit of a fixed interest rate, and they generally don’t require collateral. But the downside to them is that they may come with a variety of fees and potentially higher interest rates.
Alternatives to refinancing
While the above options are the most common ways to refinance a HELOC, there are other ways to get help with payments:
- Fixed-rate HELOC: Some lenders offer the option to convert some or all of your HELOC into a fixed-rate HELOC. This may be a good move if you spot a low rate and want to ensure more predictable payments.
- HUD assistance programs: The Department of Housing and Urban Development offers several programs designed to help homeowners struggling with mortgage payments.
The bottom line
If you’re a homeowner who is nearing the close of the draw period and the start of the repayment phase of your home equity line of credit, you may experience sticker shock when you realize that higher payments are required.
Even if you aren’t shocked at the higher payments, you may just need more funds for further home improvements or debt consolidation, which you can’t get from your HELOC during the repayment phase. Refinancing would make it possible to take advantage of that equity and potentially save on your home equity line of credit rate in the process. Before committing, compare all of your options and shop around to find the best rate.
Can you refinance a HELOC into a mortgage?
Rolling your HELOC into your current mortgage is possible through cash-out refinancing. Cash-out refinancing is the process of taking out a new mortgage for more than you currently owe on your home and receiving the difference in cash to pay off your HELOC. Before doing this, however, make sure that the interest rate you’re offered is lower than the one on your current mortgage, and take into account any application or origination fees.
How often can I refinance a HELOC?
Like a mortgage, a HELOC can be refinanced as many times as you wish. That said, HELOCs almost always come with fees and closing costs, so you’ll sink money every time you choose to take one out.