Options to refinance your HELOC
Alternatives to paying off your HELOC
- Refinancing into a new HELOC sustains a line of credit but increases your debt.
- Refinancing into a home equity loan provides better interest rates than a new HELOC.
- Refinancing a HELOC and first mortgage together yields the lowest rates, but standard closing costs apply.
The start of a home equity line of credit (HELOC) payback period can catch borrowers off guard. After several years of low payments, a sudden spike in monthly dues can become a financial burden. If your HELOC draw period has come to an end and you’re starting to struggle, you have several options for how to proceed.
A HELOC is a revolving line of credit secured by the equity you have in your home. There are two phases. The first is a five- to 10-year draw period, where you are able to draw money from the credit line and required to pay the interest only. HELOCs typically have variable interest rates, so payments can change periodically. Once the draw period comes to a close, the borrower is expected to begin repaying the principal plus interest. This payback period is the second phase of the loan and is typically a term of 10 to 20 years.
Repay the HELOC
The simplest option is to begin repaying the HELOC in line with the agreed loan terms. The transition from the draw period to the payback period can see monthly loan payments increase exponentially, however. Not only must the principal be repaid but interest rates may have risen since you took out the HELOC, resulting in much higher loan costs.
If you are underwater on your home — that is, you owe more than the home is worth — repayment is your only option as it will be nearly impossible to find a lender who will refinance a HELOC if you are underwater.
If making higher monthly payments is not possible for your financial situation, contact your lender to see if a more manageable repayment plan can be arranged. Your lender is not obligated to help you, though many work with borrowers to reach a mutually beneficial arrangement.
Refinance into a new HELOC
If you have a large outstanding balance that you cannot pay off, or simply want to keep a line of credit open, consider refinancing into a new HELOC. The new HELOC will pay off the original one and start a new draw period.
The risk of refinancing into a new HELOC is that you will accrue more interest on top of your existing loan balance. You will have an even larger variable-rate loan that could potentially have a higher interest rate in the years to come. Given this risk, it is harder to qualify for a HELOC refinance. In addition to standard loan application documents, HELOC lenders will want to see a low loan-to-value ratio and the financial ability to pay back the loan principal, not just the initial monthly interest payments.
Refinance into a home equity loan
A home equity loan, also known as a second mortgage, is another option. As its name states, a home equity loan is also secured by your property, but is a lump-sum term loan as opposed to a revolving credit facility.
By refinancing into a home equity loan, you do not accrue more debt in the form of interest. In fact, interest rates are fixed for most home equity loans, which can be an added benefit. As a second mortgage, home equity loans have higher interest rates than first mortgages but lower closing costs.
Refinance your mortgage, include the HELOC
If you are interested in refinancing your first mortgage — the mortgage used to purchase your home —consider rolling the HELOC into the loan. This would involve taking out a completely new mortgage on your home and using it to pay off both your original mortgage and HELOC.
This arrangement has the lowest interest rates because your new mortgage lender has the first lien position on your home, meaning they have the primary rights to your property should you default. The downside of refinancing a HELOC into your mortgage is that you will have to go through all of the paperwork and closing costs that a mortgage requires. Note that this restarts the clock on your mortgage.