How to refinance a HELOC and save money by doing it

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

When it comes to a Home Equity Line of Credit, or HELOC, refinancing can be a particularly useful tool if you want to extend your drawdown period, take advantage of the equity in a new home, or just get some cash. more advantageous loan conditions.

During this time of historically low interest rates and rapidly rising home values, it’s important to learn more about how refinancing a HELOC could help you: [debt] in a comfortable and structured situation ”, declared David demming, president of Demming Financial, a financial planning firm in Aurora, Ohio.

How to qualify to refinance your HELOC

Qualifying to refinance a HELOC is much like qualifying for any form of loan or credit.

The first thing a lender will look at is your credit score. You want to make sure you have a strong score that gives the lender confidence that you can pay your bills on time. (If you are unsure of your current credit score, you can check it for free using Experiential or TransUnion.)

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

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

Most lenders operate with a maximum loan-to-equity ratio of 80-20, which means they are willing to lend up to 80% of the available equity in your home. (In the previous example of an owner with a net worth of $ 100,000, that would mean their HELOC could be a maximum of $ 80,000.)

Finally, the lender will take your income into account. As with any loan, a bank wants to make sure that you have enough income to regularly make your payments on the HELOC, even if your financial situation has changed since you first took out the line of credit.

Certified financial planner Nadine marie burns experienced this when she tried to refinance a HELOC. “One thing that tripped us up was the income, because my husband had a lower paying job and he was the only one [borrower] on the HELOC in the past. Now they needed our common income, ”said Burns, president and CEO of A New Path Financial, a financial planning firm in Ann Arbor, Mich.

Another potential stumbling block could be if you’ve 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, refinancing your HELOC can be done in different ways. “Education and understanding your other options is of critical importance,” Demming said. Here’s a breakdown of the options, along 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 difficulty making your payments and new loan terms would allow you to catch up. One of the advantages of this option is that it can be the easiest and fastest way to better loan terms. But the downside is that it might not be offered by all lenders.

2. Get a new HELOC

Starting from scratch with a new HELOC gives you a kind of reset. it could help you To take advantage of new equity in your home, extend the drawdown period and could give you time to consolidate your financial situation before you are forced to make payments.

Michelle Petrowski, a certified financial planner in Phoenix, said she recently opened a new HELOC on her own and was impressed with the low rates, no closing costs and the minimal amount of paperwork.

Pro tip

If your home has risen in value or you are looking for better terms, now is a good time to consider refinancing your HELOC.

But beware: a new HELOC might increase the total amount of interest you pay over time, and it might be tempting to withdraw more money afterwards.

3. Refinance your HELOC and mortgage together

Refinancing your mortgage alongside your HELOC can give you better terms and conditions, more bargaining power, and a complete way to restructure your payments. Especially if your HELOC has a variable interest rate (as most are), refinancing everything 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 lead to 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 pay off your HELOC. This could again allow you to lock in interest rates and fixed payments, but keep in mind that it could also lengthen the payment period and increase the total interest paid.

Alternatives to refinancing your HELOC

If none of the traditional refinancing choices work for you, there are other ways to pay off your HELOC, but they might not be as beneficial.

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

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

Conclusion

If you’re having trouble keeping 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 a favorable HELOC, if you are able to qualify.

Just be sure to weigh the different refinancing avenues to make sure you select the strategy that’s right for you in the long run.


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