If you’re thinking of refinancing a HELOC, you probably already have one. However, if you’re considering one and want to know your options you should understand what a HELOC is and how it works.
A HELOC is a home equity line of credit secured by your home. It is a revolving line of credit from which you may draw money from to use for a home improvement, to pay off high-interest debt or other expenses.
HELOCs have two phases—a draw period where you only pay the interest on what you take out and a repayment period where you don’t draw any more funds, but start to pay down your principal and interest from the money you borrowed. The draw phase typically lasts around 10 year and the repayment period is around 20 years.
Reasons to refinance a HELOC
When the repayment period begins, your monthly payments will increase. This is the point where you may want to refinance your HELOC if the payment is too high to afford. Besides reducing the payment, other reasons to refinance a HELOC include lowering your interest rate or getting more money from your home’s equity.
Are you eligible to refinance your HELOC?
You will likely need to meet certain income and asset requirements to refinance a HELOC. These requirements may require you to provide certain information which may include, but not be limited to:
- Proof of income (W-2s, pay stubs)
- Tax returns
- Mortgage statements
- Identification documents
- Debt and assets
Having a good credit score and good credit history by making payments on time can help you get a good interest rate when you refinance a HELOC.
Another consideration is that you need to have sufficient equity remaining in your home. Most HELOCs don’t let you borrow 100% of your home’s value because you are using your home as collateral. In order to refinance, you may need to meet a certain combined loan-to-value threshold. The combined loan to value threshold takes into account the property value, balance of the first mortgage and balance of the HELOC.
If you decide to refinance a HELOC, you have a few options to consider:
A Loan Modification
You could ask for a loan modification from your lender. If you’re experiencing financial hardship, you could contact your lender and ask to change the loan repayment term for the home equity line of credit to make your payments more affordable.
Pros - This is a good option if your mortgage is underwater.
Cons - However, not all lenders will have this option available and are not obligated to offer it.
You could open a new HELOC
This defers the repayment period by extending the draw period and may allow you to access additional equity in your home.
Pros - This gives you time to help improve your financial situation and avoid default.
Cons - This will increase the amount of interest you will pay. Starting over with a new draw period may also tempt you to take out more money and add to your debt.
Refinance the HELOC into your mortgage
This would involve taking out a new mortgage and paying off both your original mortgage and the HELOC.
Pros - By combining your two mortgages into one, it could help you get a lower interest rate and a standard loan term with a fixed rate. Typically HELOC interest rates fluctuate and are higher than a traditional mortgage. A fixed rate would also result in a fixed principal and interest payment.
Cons - There may be closing costs and additional paperwork similar to a home purchase.
Apply for a home equity loan
You could refinance your HELOC to a home equity loan. This loan is different than a HELOC in that it’s not a credit line, but a lump-sum of money you take out using a second mortgage.
Pros - Interest rates and payments on a home equity loan are fixed and closing costs on a home equity loan are lower than a refinance into a first mortgage.
Cons - While a longer term loan makes for lower monthly payments, you will pay much more interest in the long run.
Look at your financial situation and your long term goals and weigh the pros and cons of a HELOC refinance.