Yes, you can refinance a home equity line of credit! And, done correctly, it can be a smart financial move.
Most people are familiar with the idea of refinancing a mortgage. Mortgage refinancing is commonly used by homeowners who want to restructure their payments or take advantage of a lower interest rate environment. A home equity line of credit (HELOC) can also be refinanced to achieve these benefits and others as well. Based on the goals they want to achieve, homeowners may have multiple options for refinancing their HELOC.
What Are the Benefits of Refinancing a HELOC?
HELOCs have an initial draw period, which typically lasts 10 years. During this time homeowners can borrow money from their line and elect to make principal payments they are comfortable with, as long as the interest is paid. Many homeowners elect interest-only payments during this period.
After the draw period ends, homeowners can no longer borrow from their HELOC and instead must begin making fully amortized interest and principal payments each month. This second stage is known as the repayment period, which can run from 5 to 20 years, depending on the terms of the loan.
Refinancing a HELOC can offer a variety of benefits, in different stages of the loan.
- Extend borrowing period. For homeowners nearing the end of their draw period, refinancing can give them more borrowing time.
- Push back principal payments. Refinancing can push mandatory principal payments back a few more years. Homeowners can choose to make moderate principal and interest payments over a longer length of time or delay principal payments altogether until they are in a stronger financial position, for example when they expect to be making a higher income.
- Get lower rates. In an environment of dropping interest rates, homeowners may benefit from lower rates by refinancing.
- Switch to fixed rate. Refinancing can be used to switch balances from an adjustable rate to a fixed rate, giving homeowners the security of predictable monthly payments of principal and interest.
- Access additional credit. If the home’s value has increased since the original HELOC was established, refinancing may help homeowners take advantage of their additional equity to access additional funds.
No matter what their reasons, when homeowners consider refinancing, they need to look carefully at both the pros and the cons. HELOCs are loans, which must be paid off eventually. Homeowners can damage their financial stability and risk unnecessary stress by over-borrowing or by delaying repayment too long.
Failing to repay a secured loan puts the underlying assets at risk, so homeowners should always protect their homes by monitoring their spending carefully and making sure they can afford their loan payments.
What Are the Options for Refinancing a HELOC?
There are three basic ways to refinance the balance in a HELOC.
- Open a new HELOC. Homeowners start over with a new rate, new credit limit, new draw period and new interest-only repayment period. If homeowners qualify for a new HELOC, this option can offer any or all of the benefits above except conversion to a fixed rate. However, getting a new HELOC can result in paying substantially more interest over time and, if homeowners aren’t careful, can leave them with a large balance due at an inopportune time like retirement.
- Refinance into a new first mortgage. Homeowners may choose to cut down monthly payments and reap the benefits of a fixed interest rate by refinancing their existing mortgage and HELOC together into a new fixed-rate first mortgage. They might also be able to apply for a cash-out refinance of their first mortgage that provides enough extra cash to pay off their HELOC. However, these options can incur closing costs, extend a homeowner’s period of indebtedness and generate extra interest expense.
- Take out a home equity loan. The major advantage of a home equity loan over a HELOC is its fixed interest rate, which can make repayment easier and more predictable with payments that remain steady every month. A home equity loan may also help lower high monthly payments during a HELOC’s repayment period. This option will generally add fees and closing costs to the loan expense. However, some HELOCS, including those from Bethpage, feature a Fixed-Rate Loan Option, which allows borrowers to convert some or all of their HELOC balance to a fixed-rate loan without paying additional costs.
How Do I Refinance My HELOC?
Refinancing a HELOC through any of these options requires borrowers to have good to excellent credit and adequate home equity to qualify for the loan amount they need. Lenders most commonly allow homeowners to borrow up to 70% to 85% of their home equity, although this can vary. Borrowers must also be prepared to present proof of their ability to repay the new loan.
When you are ready to start the process of refinancing your HELOC, whichever option you choose, you’ll need to have on hand:
- Personal information, including full legal name, address and Social Security number
- 2 most recent pay stubs and information about your employment history
- 2 years of full tax returns, including all schedules and W2’s
- Business tax returns, if self-employed
- Proof of any other payments you receive, such as social security, disability or pension income
- Current HELOC and 1st mortgage statement (if you are currently paying a first mortgage), plus information on property taxes and insurance
If you are applying jointly, don’t forget to have this information available for your co-applicant too.
Refinancing My Bethpage HELOC
If you’re interested in finding out more about how refinancing your HELOC may fit into your individual financial plan and situation, contact our Bethpage home financing experts for more information and personal guidance.
If you’re ready to use refinancing to help achieve your financial goals, check out our latest HELOC interest rates today and then begin your refinance journey.