A home equity line of credit is a useful financial tool for homeowners. Unlike a traditional home equity loan, which has a fixed repayment schedule, the line of credit, also known as a HELOC, has a more flexible repayment schedule. It also has a more flexible payout schedule; instead of receiving the money in a lump sum, those who have a HELOC can withdraw funds as needed. If there is no balance, there is no payment due. And when the funds are repaid, they can be borrowed again. The HELOC is a great tool for financing anything that has an ongoing expense, such as a do-it-yourself home remodeling project.
But there are downsides to home equity lines of credit, and one of those is the variable interest rate. Home equity loans, with fixed repayment schedules, have fixed interest rates. A HELOC, with its greater flexibility, does not. As interest rates continue to rise, that could be a problem for homeowners who have a HELOC with a large outstanding balance. The payments will increase, and that could make some homeowners uncomfortable.
What are your options if you have a HELOC and rates are rising? Here are several things that you can consider:
Just keep it - For some, the flexibility of borrowing money when needed and as needed is paramount. If you only borrow against your credit line occasionally and repay fairly promptly, or if you want to keep your HELOC as a source of funds in case of emergency, then you should simply hang on to it. Just be aware that your payments will be higher if rates continue to rise.
Exchange it - Instead of a HELOC, you could take out a traditional home equity loan and pay off the balance of your line of credit with it. You will now have a fixed monthly payment over a fixed period of time. One downside, however, is that you lose the ability to borrow again. To do so, you will have to apply for another loan.
Refinance your house - One other option is to refinance the entire mortgage and include the balance of the line of credit in the amount to be financed. This will reduce the number of payments you need to make each month from two to one and will simplify your finances somewhat. On the other hand, you will now be financing that HELOC money over as long as 30 years, which might not make sense if you used the line of credit to buy something that won't last that long, such as an automobile.
Everyone has different financial needs, which is why lenders offer such a wide variety of loan options. If you are uncertain as to what you should do about your line of credit, you may wish to consult with a lender in order to see which options are right for you.
Several options are available when deciding to refinance your home equity line of credit. You can opt to refinance all your mortgages into one. Or you can rollover your line of credit into a second mortgage. Available terms and rate structures also give you flexibility in structuring your payments. Make sure that when you refinance, you find the lender with the optimal financing for your selected terms.
The Decision To Refinance All Or One
While you are refinancing your home equity line of credit, it is also a good time to revaluate your other mortgage. Depending on your original terms, you may find that you also want to include your first mortgage as part of a refi. This way your line of credit refinancing will qualify for even lower rates while saving on closing costs.
But if you have exceptionally low rates on your first mortgage, then refinance your line of credit as a second mortgage. If you are undecided on the issue, request loan estimates for both types of refinancing and let the numbers tell you which is the best option.
Refinancing is also a good time to consider cashing out part of your equity. By doing so now, you save on additional processing fees for any future loans.
Available Term Options
Once you have decided on how much you want to refinance, you will also need to select appropriate terms for you financial goals. Rates can be fixed or adjustable, which affect your payment amount.
The length of your loan can be shorten or lengthened to give you a more manageable payment. But if you do decide on a short term, you may see your rates go down. You can also structure payments for every two weeks, further reducing your loan's period.
No Lender Has The Best Deal On All Types Of Refinancing
No lender can guarantee to have the best deal on all types of refinancing, so shop around with your specific loan amount and terms. With risk free quotes, you can learn about loan costs without hurting your credit score. And with online lenders, the whole process just takes a few minutes.
Both Charles Essmeier & Carrie Reeder are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.