When your HELOC draw period is coming to a close, and the repayment phase is upon you, you may find yourself struggling to keep up with payments. If you have opted only to pay interest during the draw period, you may be shocked at the new, higher monthly payments of interest and principal that are now required, and you may wonder, can a HELOC be refinanced? It is possible to refinance a HELOC. If you are thinking about it, you have a few options to choose from, and you may be able to keep your HELOC.
Key TakeawaysThere are a few ways that a HELOC can be refinanced and payments decreased. Your options are to request a loan modification to your current HELOC, get a new HELOC, refinance your HELOC and mortgage into a new first mortgage, or get a home equity loan to pay off your HELOC.You may want to refinance your HELOC if you're having a hard time making the monthly payments and want better loan terms. Refinancing could also help you lock in a low fixed interest rate. Another reason to refinance is that you may need more time and funds to make further home improvements. Each refinance option comes with its own set of pros and cons. Carefully consider each option and your situation before deciding which alternative suits your needs the best.
Reasons to Refinance a HELOC
A HELOC is a type of revolving credit line backed by the equity you have in your home, which means your property is used as collateral and secures the line of credit. HELOCs are divided into two phases: the draw period, during which you can borrow money from the credit line, repay, and borrow again, and the repayment period, during which you pay back any outstanding balance.
During the draw period of your HELOC you are only required to pay interest on what you borrow. During the repayment period you can no longer withdraw funds, and you have to make monthly payments of principal and interest. If you've opted to pay only the interest during the draw period, you may be shocked at the increased monthly payments once you reach the repayment phase. Refinancing your HELOC may help make payments more affordable and could also allow you to take advantage of interest rates trending lower.
Another reason to refinance is that you may need more time and funds to make further home improvements. If your home's value has increased, you may be able to get more money from your home equity to complete the additional projects.
Ways to Refinance a HELOC
There are a few ways to refinance your HELOC. Consider your situation and your reason for refinancing, and make sure to check your options with several lenders before settling on a solution.
The first option when you're having difficulties making payments is to request a loan modification. Your lender may lower the interest rate or increase the repayment term to make your monthly payments more affordable and help you avoid defaulting.
To get your loan modification request approved, you will have to prove to your lender that you will be able to make payments under the new, negotiated terms. Keep in mind that not all lenders offer loan modifications.
If you want to buy time before entering the repayment phase, you may choose to open a new HELOC. This allows you to extend the draw period and its interest-only payment requirement and avoid principal payments for a while longer. This option may also be good if your home value has increased and you want to make a few more adjustments or improvements to your home and need more time and funds to do so.
Getting a new HELOC and draw period may tempt you to borrow more, so make sure not to borrow beyond your means. Remember that you will eventually need to pay back your loan, and the longer you put it off, the higher your interest and your monthly payments will be. Also, keep in mind that because HELOC rates are adjustable, they may keep going up.
Another option is to refinance your mortgage and HELOC together into a new first mortgage. This way, you may be able to secure a significantly lower interest rate. First mortgage rates are generally lower than both HELOC rates and home equity loan rates, as the first mortgage lender is first in line to profit if you were to default on payments and your house was to get foreclosed on.
A new first mortgage usually has a fixed interest rate, making your monthly payments more predictable and plannable, but keep in mind that closing costs may be high.
Your fourth option is to get a home equity loan, also called a second mortgage, to pay off your HELOC. Since a home equity loan is paid out in a lump sum, you can use it to pay off your HELOC, and you won't be tempted to keep borrowing, as can happen with a revolving credit line. You will also get the stability of a fixed interest rate and steady monthly payments that don't change. The downside can be closing costs and fees and the fact that a long, drawn-out payment period can increase the total interest you will have to pay.
Are you considering getting a HELOC? Aven can get you approved in as fast as 15 minutes. Find out more and decide if it is the right choice for you!