How to refinance a HELOC and save money

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Refinancing: It is a term that is used a lot, but it can have many different meanings and uses.

When it comes to a home equity or credit line or HELOC, refinancing can be a very useful tool if you want to extend the draw period, take advantage of new equity or just get more favorable loan terms.

During this period of historically low interest rates and rapidly rising housing values, it is important to learn more about how refinancing a HELOC could possibly help you: “The point is to save money, save interest and pay [debt] “down in a comfortable, structured situation,” he said David DemingPresident of Demming Financial, a financial planning company based in Aurora, Ohio.

How to qualify to refinance your HELOC

Eligibility for refinancing a HELOC is very similar to eligibility for any form of loan or credit.

The first thing a lender is going to consider is your credit score. You want to make sure you have a consistent rating that gives the lender confidence that you can pay your bills on time. (If you are not sure what your current credit score is, you can check it for free using Empirical the TransUnion.)

But this is not the only factor that a bank takes into account when it comes to refinancing a HELOC.

The lender will also consider the loan-to-equity ratio. First, let’s define equity. Equity is the amount of value in your home after you subtract any home loans. For example, if your home is worth $ 500,000 and you have a $ 400,000 mortgage, you have $ 100,000 in equity.

Most lenders work with a maximum loan-to-equity ratio of 80-20, which means they are willing to lend up to 80 percent of the available equity in your home. (In the previous example a homeowner who has $ 100,000 in equity, this would mean that his HELOC could be a maximum of $ 80,000.)

Finally, the lender will look at your income. As with any loan, a bank wants to make sure you have enough income to make consistent payments to HELOC, even if your financial situation has changed since you first received your credit line.

Certified financial designer Nadine Marie Burns experienced it first hand when he tried to refinance a HELOC. “One thing that upset us is the income, as my husband got a lower paid position and was the only one [borrower] in HELOC in the past. “Now they needed our common income,” said Burns, president and CEO of A New Path Financial, a financial planning company based in Ann Arbor, Michigan.

Another potential hurdle may be if you have recently retired. In that case, be prepared to show that you can maintain your income for at least 36 months, Demming said.

4 ways to refinance your HELOC

Depending on your needs, HELOC refinancing can be done in different ways. “Training and understanding your other choices is extremely important,” Demming said. The following is an analysis of the options, with the pros and cons of each.

1. Modify your existing HELOC

Banks and lenders are sometimes willing to modify an existing HELOC if you meet certain conditions, especially if you are having trouble paying and the new loan terms will allow you to cover the difference. One advantage of this option is that it can be the simplest, fastest way to get better loan terms. But the downside is that it may not be offered by all lenders.

2. Get a new HELOC

Starting with a new HELOC allows you to reset in some way. It could help you take advantage of new shares in your home, extend the lottery period and could give you time to back up your financial situation before you have to make payments.

Michelle Petrowski, a certified financial programmer at Phoenix, said she recently opened a new HELOC herself and was impressed by the low prices, closing costs and minimal bureaucracy.

Professional advice

If the value of your home has increased or you are looking for more favorable terms, now is the time to consider refinancing your HELOC.

But be careful: A new HELOC could increase the total amount of interest you pay over time and can make it tempting to raise more money online.

3. Refinance HELOC and your mortgage together

Refinancing your mortgage along with HELOC can offer you better general terms, greater bargaining power and a comprehensive way to restructure your payments. Especially if your HELOC has a variable interest rate (like most), refinancing everyone into a new mortgage can help you lock in a fixed rate for all the debt.

The downside is that this process can be more complicated, involve more paperwork and be accompanied by potentially higher closing costs.

4. Get a home equity loan to pay off your HELOC

A less common but still viable option is to use a home equity loan (which is a lump sum) to repay your HELOC. This could again allow you to lock in fixed interest rates and payments, but keep in mind that it can also extend your payment period and increase your total interest paid.

Alternatives for refinancing your HELOC

If none of the traditional refinancing options work for you, there are other ways to repay your HELOC, but they may not be so helpful.

For example, you could apply for a personal loan – which is likely to have a fixed but higher interest rate – and use that money to repay your HELOC.

Alternatively, you can keep your HELOC as it is, but adjust other parts of your budget to free up more money to repay your HELOC.

conclusion

If you’re struggling to keep up with your HELOC payments or just want to see if you can get a better interest rate or access more equity, now is the time. Interest rates are still historically low and home values ​​continue to rise – a perfect combination of conditions for an advantageous HELOC, if you can qualify.

Just be sure to weigh the different paths to refinancing to make sure you choose the strategy that is right for you in the long run.

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