Things to Know When Refinancing a HELOC (Home Equity Line of Credit)
Hard to believe it’s been almost 10 years since the real estate downturn and resulting recession. One of the most popular products on the market toward “the end” of the housing boom was the HELOC – a home equity line of credit that offered many borrowers the opportunity to borrow 100% of their home value or more. These loans were attractive because most offered a 10 year “interest-only” period, after which the loan would recast to a short term, fully amortized (aka, full principal & interest payment), loan, with substantially higher payments
than the original interest-only, or “draw” period.
Well, here we are 10 years later, and many people are approaching their “uh oh” date, the day when the loan will recast and the payments will go up. Fortunately, many people in this position have regained all of their home equity or more since the recession, and the possibility exists to refinance these mortgages to avoid a large payment increase. Refinancing a HELOC is subject to a specific set of rules that vary widely by lender and loan type, so if you’re one of the millions with a soon-to-adjust HELOC, here’s what you need to know:
Your loan MAY be a cash-out refinance
If you used your HELOC for anything other than purchase money (aka a 2nd mortgage used solely to buy your home) since it’s inception, refinancing it into a new conventional loan will be considered a “cash out” refinance. This is important to know, especially when shopping, because cash out refinance rates are typically a little bit higher than “rate/term” refinance rates. So if you’re looking to combine your HELOC into a new mortgage and you’re noticing rates are a bit higher than you see advertised, this is likely why.
Your loan MAY be a rate-term refinance
Rate-term refinance loans (those where no additional cash is withdrawn or debt beyond mortgage debt is paid) have some of the most attractive mortgage product rates, historically. If you’re refinancing a HELOC into a conventional loan and the HELOC was used to buy your home, and not drawn against since, your refinance will be considered a rate/term refinance, and thus be offered better rates, as long as no additional cash out is taken.
If you’re considering refinancing your HELOC into a new FHA loan, it can still be considered rate/term even if you withdrew HELOC funds after your home purchase, as long as you haven’t withdrawn HELOC monies within the 12 months prior to applying for your new mortgage. This is important because FHA allows a borrower to borrow a substantially larger portion of their home equity under rate/term refinance guidelines than they do under cash-out guidelines. So if you’re still a bit short on equity, this may be one option tp get rid of your HELOC.
You can turn your HELOC into a new HELOC
Since market conditions have improved since the real estate crash, HELOCs have made a come back. There are many lenders offering HELOCs, and if you have a minimum 10% equity in your home, options should be plenty. This option is a good one for those with less than 20% equity, or a rate that’s too good on their first mortgage to give up to consolidate their HELOC into 1 new loan. A new HELOC could restart the 10 year “interest only” clock and keep your payments down for the foreseeable future. While we don’t recommend carrying an “interest only” loan forever, this could be your best option if you’re in a pinch or if it’s in your best overall financial interests.
The good news is, if you’re one of the millions with a soon-to-adjust HELOC, you have options, and your loan officer should be able to point you in the right direction and give you choices in how to best reduce the impact of the pending adjustment.
If you have questions on a HELOC, a coming adjustment, or anything else mortgage-related, you can ask an expert here!