Refinance HELOC

There is an initial draw period, of about 10 years when a borrower refinances home equity line of credit (HELOC).

When borrowers refinance HELOC they borrow money as needed from the credit loan and make low, interest-only payments on the amount borrowed.

He can no longer borrow from the HELOC after the draw period ends, and now he must start making fully amortized interest and principal payments every month.

This repayment period usually continues for 20 years. Meaning, compared to the draw period the monthly repayments period is significantly higher resulting in many homeowners ending up facing payment shock.

One way to solve the payment-shock problem is to refinance HELOC, and there are many ways to do it.

Let us look at how to qualify, what are the various options, and the advantage and disadvantages of those options.

How to Qualify for a HELOC refinance

A HELOC refinance is similar to taking out the first mortgage. The qualification is based on income, expenses, debts, and assets.

Documents like pay stubs, W-2 forms, tax returns, mortgage statements, photo ID, proof of insurance, and other documents which the loan underwriter wants should be provided.

A borrower should have a FICO score of “very good” to “exceptional” ie. 740–850 to get the lowest interest rates.

A lows score will attract a higher interest rate and also will have a harder time finding a lender to work with.

A borrower needs to have enough equity in their home after taking out the new loan which meets the lender’s guidelines for the combined loan to value (CLTV) ratio.

When the total amount borrowed is divided by the property value this calculation in a percentage form is the CLTV ratio.

The homeowners having excellent credit are provided with an option to borrow up to 100% of the value of their home by some lenders, but commonly one can borrow only 80% to 90%.

If a borrower only wants to refinance the existing HELOC balance and not more, then he should be able to find a lender who will work with him.

The more equity a lender has, the lower his interest rate would be.

There are 4 ways to refi HELOC:

Request a loan modification

If you as a borrower are going through trouble in making your payments when the draw period ends then contact your lender and explain your situation.

Request the lender to change the loan terms so that your monthly payments are affordable, and you don’t default.

A loan modification is beneficial if you are underwater on your mortgage then a loan modification could be your only option.

There is a possibility of lenders denying to modify your loan, and this option might not be available to you. If it is, then you’ll need to show that you can repay the modified loan.

There is also less federal support to lenders. In 2016 two assistance programs for struggling homeowners stopped — the Home Affordable Second Lien Modification program and the FHA Short Refinance.

Open a new HELOC

You can start over with a new draw period and the new interest-only repayment period with a HELOC refi.

If you’re struggling to make ends meet and you don’t want to default on your existing loan then the benefit of a new HELOC refi is, it buys you some time to improve your financial situation.

But you will anyway have to repay the loan someday. You’re going to owe more interest if you put off repaying it, resulting in your fully amortized principal and interest payments being higher each month.

When you enter a new draw period, you add to your existing debt.

As you’re borrowing in bits and pieces with a HELOC it is hard to know what your total borrowing costs or your monthly payments will be and the interest rate can also fluctuate.

The interest rates could be higher than what it is now when your new HELOC’s repayment period starts, resulting in those monthly payments to be larger.

Get a New Home Equity Loan

Your variable-rate HELOC balance can be turned into a fixed-rate home equity loan or a second mortgage. This will take 10 or 15 years to pay off the new balance.

When you take out a lump sum to pay off your HELOC, then you end the cycle of continuous borrowing, and another benefit being you get a fixed interest rate with stable monthly payments.

It would be helpful if you know your long-term borrowing costs and consider them when you are making your household financial plan.

The disadvantage being, when the loan term is longer then the monthly payments will be lower but the interest you’ll pay will be more.

Refinance Into a New First Mortgage

You can refinance HELOC and your original mortgage into a new first mortgage instead of simply refinancing your HELOC.

You can avail the lowest interest rates. As the first mortgage rates usually are lower than home equity loan rates because when you default on your payments, the first mortgage lender has rights on the proceeds from selling your home.

The rates for 30-year and 15-year fixed first mortgages could be 3.57% and 3.03%, but the rates for HELOCs and home equity loans are close to 4% and 5%.

So if you refinance with a fixed-rate first mortgage, you’ll benefit from the equal monthly payments and knowing your total borrowing costs upfront.

The disadvantage of it is, taking out the first mortgage would mean paying a higher closing cost than when you refinance HELOC or a home equity loan.

Conclusion

To qualify for a refinance HELOC, a borrower must have adequate home equity to meet the lender’s guidelines for combined LTV and good credit scores for the lowest interest rates.

By requesting a loan modification, opening a new HELOC, using a home equity loan to pay off one’s HELOC, or refinancing into a new first mortgage are the ways one can refinance HELOC.

Look out at all the options contact several lenders to get the best combination.

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