Refinancing a HELOC?
June 27, 2019
Several years ago, you took out an equity line of credit, or HELOC, to fund some repairs on your home, payoff higher interest rate debt, or maybe you paid for tuition or wedding expenses. You assumed when you took out the HELOC you would be in a better position to pay it off after the 10 year draw term.
The monthly payment during the draw term was easily paid, after all, only interest was due, and at a very low rate. You could worry about the principal later. Now that time is here. You are going into the repayment period and your payment is rising substantially!
The good news is that you do have options. If you think you may not be able to cover the amortization period payments on a short term, consider these;
- Talk to a knowledgeable lender as soon as you can. They know the options and what you will qualify for. Everyone is different.
- Get a new HELOC. While this is just delaying the payments that will eventually be required, you know upfront you will need to reduce the principal every month and your lender can advise you how to stay ahead of it so that your balance will be smaller and value of your home higher at maturity, especially if you have several working years to go before retirement.
- Turn your HELOC into a Home Equity Loan. What’s the difference? Home Equity Loans typically offer a fixed interest rate and term, so that you can budget your monthly payments. Sometimes they can run more than 15 years, making your payment more affordable. But the interest rate is fixed, so you don’t have to worry about it changing.
- Consider looking at your first mortgage and rolling the HELOC into a new fixed rate mortgage along with your first mortgage. This way, depending on your circumstances, your monthly payment on the combined payments could be reduced. Remember though, Home equity loans have lower closing costs than primary mortgages. However, interest rates on equity loans are typically higher than on primary mortgages, so it may still be in your best interest to put them together.
- More things to consider is your income, credit & home value. Home values in most areas have increased in the past few years, however, underwriting documentation may be different today that it was when you first obtained your mortgage. You’ll need an expert to work thru the process with you.