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These days, borrowers use Home Equity Lines of Credit (HELOCs) to assist with all sorts of expenses. Some of the most popular reasons for taking out a HELOC are college tuition, medical expenses, home remodeling, and debt consolidation. Because the interest is tax-deductible, a HELOC can be a very attractive option when you need to borrow money. You may also take out a HELOC at the same time that you secure your first mortgage when buying a home in order to finance a greater percentage of what the home is worth without the need for mortgage insurance.
Whatever the circumstance were when you took out your HELOC, the time may come when you decide to refinance it. The factors pertaining to why and how you go about refinancing your HELOC will be as individual as you are. Make sure you have clear goals as to why you are refinancing, and be certain those goals can be met by the program you choose.
One reason to refinance a HELOC, and the first one that comes to most people's minds, is the interest rate. This may or may not be a good reason depending on a few factors. Your HELOC carries an adjustable rate; therefore if rates go down, so should your payment amount. If rates are steadily rising, however, and especially if they're expected to continue to rise, refinancing your HELOC back into your first mortgage, or into a closed-end second mortgage with a fixed rate, might make the most sense.
If you originally took out your HELOC for a project or expense such as college tuition or home remodeling and that project is now completed, you may just be looking to refinance your first mortgage and your HELOC into one loan with a low fixed rate to avoid the potential for a rising rate and increasing payments in the future. Having a single loan with a fixed rate offers you the satisfaction of knowing that your payment amount will never go up.
Conversely, if you've come to the conclusion that you need to be able to draw more from your HELOC than you'd first thought, you can refinance it or, more correctly speaking, take out a new HELOC for a greater value. Keep in mind that you'll have to pay additional closing costs, and that unless you can start making much larger payments, it will take you longer to pay back the larger HELOC amount. You should carefully consider your needs and options before opting for a HELOC with a larger credit line.
When the time comes to refinance your HELOC, don't hesitate to consult with a financial planner or a loan officer. These professionals can advise you on whether your reasoning is financially sound and about the kind of program you should choose to meet the needs and goals you're setting for yourself.
You got a home equity line of credit to make your home improvements. You have finished, and now your line of credit is just sitting there. A good idea is to refinance your home equity line of credit. These lines of credit tend to have some very undesirable characteristics that often cost you even more money that you would think. Refinancing your home equity line of credit can save you money in the long run. Here's why.
Most home equity lines of credit have an adjustable rate
The adjustable rate of a home equity line of credit means that you are at the mercy of rising interest rates. Should rates rise, you will find yourself making higher and higher payments each month. If you want to make sure that you get rid of that adjustable rate and settle in for a predictable payment each month, refinance your home equity line of credit with a fixed rate home loan. You will lock in a rate, and receive protection against further increases.
It can be tempting to keep using that home equity line of credit
While a home equity line of credit is not limitless, it can be pretty easy to keep spending. If you didn't reach your limit with the home repairs, you might be tempting to take more money out. That's money that you will have to pay interest on. Remember: the more money you take out, the more interest you will have to pay. Refinancing your home equity line of credit is much like cutting up a credit card. You still have to finish paying it off, but at least you won't be using it anymore.
Fees can be a drag
While not all lenders require participation, some charge you monthly or yearly fees during the life of the loan. Also, you might have to pay transaction fees every time you use money from your home equity line of credit. As if paying interest weren't enough! If you refinance your home equity line of credit you can pay off the home equity line of credit and get rid of those extra fees.
Avoid the big payment
Some home equity lines of credit require a large payment at the end of the loan term. Not all lines of credit require this, but some do. You make your monthly payments, and then at the end of the term, you realize your payments weren't enough to cover. Now you have a big payment. You can usually finance this at the time. However, you can avoid the shock and the hassle if you refinance your home equity line of credit with a regular fixed rate home loan.