How to Refinance a HELOC – You have been repaying the interest on your previous home equity line of credit (HELOC) withdrawals. As the draw period concludes, it is necessary to begin paying off your principal balance with interest. However, these bigger payments are a true hardship. The best solution is to refinance a HELOC. Refinancing your HELOC can reduce your monthly payments by lowering your interest rate, payment amount, or both. Additionally, there are a number of ways you can refinance a HELOC. In this article, we will highlight several methods that are the best solution to refinance a HELOC.
How to Refinance a HELOC
A home equity line of credit (HELOC) is a financing option that allows borrowing against the value of your house with lenders approving a certain balance. Compared to unsecured loans, HELOCs have lower interest rates because they are secured by your home. However, the lender may foreclose on your house if you don’t make your payments.
The following are methods to refinance a HELOC:
Open a new HELOC
You can improve your financial stability and avoid repayment for an additional ten years by refinancing your HELOC with a new 10-year draw period and interest-only repayment period. However, because HELOC interest rates fluctuate, there is a chance that interest payments will increase over time. Furthermore, borrowing becomes simpler when you enter a new draw period, but taking on more debt may make your financial status more precarious. To guarantee a more stable financial future, it is crucial to thoroughly weigh the advantages and disadvantages before refinancing.
Refinance into a home equity loan
Home equity is also a collateral in a home equity loan, but it also comes with closing costs and fees. It can lessen the payment shock that HELOCs frequently cause. This is because it has a fixed interest rate, a fixed payment for the duration, and no draw period. To prevent the shock that occurs when payments become unaffordable, the borrower must make artificially low payments.
Loan modification
Requesting a change to your loan’s terms or interest rate in order to better manage your monthly payments is loan modification. For people who are worried about payment issues following the draw and repayment periods, this option is advantageous. Longer repayment terms, possibly lower interest rates, and the ability to free up funds for other debts are among the advantages. It’s not always possible, though, and your request might be get a disapproval.
Fixed-rate loan
Since most HELOCs have variable interest rates, it can be challenging to forecast your monthly payments. Borrowers can opt to refinance into a fixed-rate loan through personal or home equity loans. Generally, home equity and personal loans are paid directly to an existing loan or deposited as a single, lump sum into your bank account. You can convert to a fixed monthly payment plan and use that lump sum to pay off the remaining balance on your HELOC.
Refinance into a new mortgage
Consider refinancing into a 15- or 20-year mortgage to reduce total interest payments, as primary mortgage interest rates are typically lower than HELOC interest rates. However, this approach typically requires a lot of paperwork and is more complex. Closing costs must also be taken into account. Therefore, it is usually best to take out a new mortgage that includes your HELOC only if you are able to obtain a much lower interest rate.
Refinance using a personal loan
In addition to providing advantages like exchanging debt linked to your home equity for new debt without putting your house at risk, a personal loan settles your HELOC. You won’t lose your house if you default on a personal loan, but it can harm your credit score and possibly result in a lawsuit. On the other hand, mortgage interest rates are usually lower, which could result in higher total interest or higher payments.
Get a cash-out refinance
Cash-out refinance involves paying off a mortgage and HELOC with a single loan, potentially lowering monthly payments and locking in a fixed interest rate, but incurs closing costs and fees. Depending on the value of your house, this option gives you extra money for a variety of purposes.
What If I Don’t Refinance HELOC?
Loan modification may be the only option for homeowners unable to refinance their Home Equity Line of Credit, particularly those with underwater mortgages, reduced credit scores, or low income. To apply for a loan modification, speak with your loan servicer and explain your circumstances before missing a payment, as it may be a viable option if you cannot repay your loan. You might have to finish a three-month trial period to prove that you can make the changed payments if the lender doesn’t require modification. However, your credit score might decline if you choose this course of action.
Should I Refinance My HELOC?
Before refinancing your HELOC, it is crucial to assess your initial reasons for considering such a move. The cost of borrowing from your HELOC may be reduced if you’re refinancing to reduce your interest rate. However, you might wind up taking out a longer-term loan that is more expensive if you are refinancing because you are unable to make the monthly payments. Regardless of why you are refinancing, be sure you are aware of your objectives and the possible short- and long-term effects of the process.
