How to refinance a HELOC

Extract home equity line of creditor HELOC, is a simple way to exploit your home equity — often at a lower interest rate than you’ll get with other types of financing. Common uses for HELOC funds are home renovations, major living expenses like tuition, or paying off high-interest debt like credit card debt.

This type of loan lets you borrow against the equity in your home — that is, the value of the house above what you owe on the mortgage — and works, in some ways , like a credit card. A HELOC is a revolving line of credit, so you can make repeated withdrawals over a long period, called a drawdown period. The standard HELOC draw period is 10 years, but it can range from five to 20 years.

One of the main advantages of a HELOC is that you can choose to pay interest only during the drawing period; this means you can borrow a large amount of money over a long period of time, while making only small payments. However, once the repayment period begins, your monthly payment will increase as you will need to make payments for the principal balance and interest. When this happens, it may be beneficial to refinance your HELOC.

If your draw period is coming to an end and you’re looking for ways to keep your monthly HELOC payment low, or you just want to lock in a lower interest rate, refinancing might be an option. Below we describe some of the ways to refinance a HELOC.

6 Ways to Refinance a HELOC

There are several ways to refinance a HELOC, and the best one for you will depend on factors such as your home equity and your current interest rate. “Refinancing a HELOC can be beneficial if you’re looking to move away from a variable rate to lock in a fixed rate, or if you’re trying to avoid the payment shock of a HELOC that has come to the end of its drawdown period. and will now require larger principal and interest payments,” says Greg McBride, chief financial analyst at CNET’s sister site Bankrate.

Super important: It is crucial to recognize that a HELOC is a loan secured by your home, so whichever refinance option you choose, make sure you can comfortably afford your new monthly payment. If you default on this type of loan, your lender can repossess your property.

Below we provide an overview of the most common ways to refinance a HELOC.

Ask your lender to work with you

Perhaps the easiest way to refinance your HELOC is to request a new agreement from your current lender. Some banks and lenders may be willing to renegotiate terms, reduce or lock in your interest rate or extend the term of your loan. Ultimately, lenders want their loans paid off and they may be open to compromise, especially if you have a consistent payment history. “Ask your current HELOC lender if they will fix the interest rate on your outstanding balance,” McBride says. “Nothing ventured, nothing gained.”

Refinance into a home equity loan

Refinancing in a home equity loan eliminates the uncertainty of a variable interest rate and provides you with lump sum cash. And the fixed interest rate on a home equity loan may seem even more attractive now, as interest rates continue to rise.

Take a new HELOC

You box take out a new HELOC to pay off your existing HELOC. This will open a new drawdown period and allow you to continue making interest-only payments for years before being hit with higher monthly principal payments again. That said, you’re essentially kicking the box on the road – and setting yourself up for even bigger monthly payments once your new draw period ends. This is a risky and potentially unsustainable decision – and should be undertaken with caution.

Transfer your debt to a personal loan

Personal loans often have higher interest rates than other types of loans – including, usually, HELOCs – because they are unsecured. On the other hand, a personal loan will not require you to put your house as collateral.

Refinance your HELOC into your mortgage

Another option is to consolidate your HELOC and main mortgage into one new mortgage – if you can get one lower interest rate, sure. You can also adjust the duration of your loan. Shortening it would increase your monthly payment, but decrease the total interest you’ll pay over the life of the loan. Extending it would require you to make a higher monthly payment, but pay less in the long run.

Refinance by collection

A refi collection can give you a lump sum of cash at a fixed interest rate, similar to a home equity loan. But a cash-out refi usually only makes sense if you can lock in a lower interest rate – which is unlikely for most homeowners in the current economic climate. “With some of the highest mortgage rates in 14 years, cash refinancing to pay off HELOC isn’t particularly attractive right now,” McBride says.

How to Qualify for HELOC Refinance

Qualify for HELOC Refinance is similar to applying for a mortgage. A lender will assess factors such as:

  • What is the equity in your home: Lenders generally want to see at least 15% to 20%;
  • Your credit score: Lenders generally look for a minimum score of 620, although you need a score of 700 or higher to qualify for the lowest rates.
  • Your debt to income ratioor DTI, defined as your monthly expenses divided by your gross monthly income: lenders will look for a DTI of 43% or less;
  • Your combined loan-to-value ratioor CLTV, which is the value of your property compared to all of your loan and mortgage balances.

The bottom line

Refinancing a HELOC can be a cost-effective way to lower your monthly payments and save money by lowering your interest rate. Deciding which is the best way to refinance your HELOC depends on factors such as your loan amount, what you are use the funds tothe repayment period and what you interest rate is. While refinancing a HELOC can save you money, keep in mind that the process will also include additional costs such as closing costs. Be sure to shop around and compare rates and fees from different lenders to ensure you get the best deal available to you.

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