Sometimes we need a little extra cash. Your home is a great way to free up some much-needed money to achieve your goal, especially if you’re doing a renovation and want to cap the amount you wish to borrow. A HELOC is a great choice. A HELOC is considered a second mortgage (but with a revolving credit limit), so it will be a separate monthly payment from your original mortgage.
Here are a few refinance options if you think you cannot cover your monthly bill during the repayment period.
READ MORE: Home equity loan requirements
7 Home Equity Line of Credit (HELOC) Refinancing Options
If your draw period ends and you still have home renovations to complete, or you’ve been making interest-only payments, you could have some sticker shock when the prices are due. You may find yourself needing to refinance. Here are five methods that could help.
Talk to Your Lender
Some will adjust your interest rate or your monthly payment. A loan modification can relieve some of the financial pressure you feel by lowering your monthly costs and stopping collection activity.
But loan modifications are not foolproof. They could increase the cost of your loan and add derogatory remarks to your credit report.
That doesn’t mean you should avoid a loan modification. But before you jump at the chance, consider all the angles.
A loan modification may realistically be your only option if:
- You’re underwater on your mortgage
- Your credit score is less than 620
- Your income isn’t high enough to cover monthly payments on a new loan
Borrowers should contact lenders as soon as possible, ideally before you’ve missed a payment. Some lenders have hardship programs in place.
Bank of America, for example, has a program that will grant homeowners a longer-term, lower interest rate, or even both. Still, you’ll have to prove you’ve experienced a sudden financial hardship, like a divorce or job loss.
Lenders aren’t required to modify your loan, though, or you may be asked to complete a three-month trial period while the lender ensures you can make your new payments.
READ MORE: Is a home equity loan a good idea?
Do You Qualify for HUD Assistance Programs?
The Department of Housing and Urban Development offers some hardship programs if you’re struggling with mortgage payments. Some of their programs are listed below.
- Section 8 housing vouchers for low-income families.
- Seniors can receive rent assistance from Section 202 vouchers.
- Housing for the disabled, including Section 811, can help those living on SSI or SSDI, among other benefits.
- Each HUD-affiliated agency will offer HUD-funded emergency, low-income housing, and rental assistance programs.
- Assistance is also provided to families looking to buy a home, including mortgage and down-payment help.
READ MORE: Hardship loans for bad credit
You can apply for a new loan and start a new draw period. However, your interest rates may be higher than what you’re paying on your current HELOC. The adjustable interest rate could be a benefit should the current high mortgage rates fall.
READ MORE: How to refinance a paid-off home
Can You Transfer to a Fixed-Rate HELOC?
You can usually convert part or all of the HELOC balance to a fixed rate with a definite term at closing or during the draw period. You can’t do it during the repayment period. If you do it during this time, you will need to refinance and convert it to a fixed rate.
If you can transfer your existing HELOC to a HELOC with a fixed interest rate, this could lower your monthly payments and the total interest you’ll pay.
READ MORE: How to get help with high-interest loans
Pay Your HELOC Off With a Home Equity Loan
A home equity loan is different from a HELOC. With a home equity loan (also called a second mortgage), you get the money in a lump sum, while a HELOC works more like a credit card and usually has a variable interest rate. A fixed loan amount will have a fixed interest rate, which means a fixed monthly payment. However, the interest rate may increase. Plus, you could potentially have a more extended repayment period.
READ MORE: Home equity loan closing costs
Get a New Mortgage
Use a cash-out refinance to refinance your current mortgage loan and HELOC into a completely new mortgage. You can choose a 15-year or 20-year mortgage to reduce the total interest cost. Then you use some of the cash from the new loan to pay off your current mortgage balance.
While interest rates on primary mortgages may be better than what you pay on your HELOC, they’re currently at historic highs, and you’ll also have to factor in closing costs.
A mortgage refinance will also involve a lot of paperwork, including pay stubs and tax returns. However, qualifying will be simpler than your first mortgage since you already have some home equity.
A HELOC is only in your best interest if you can finance a lower interest rate than what you’re paying on your first mortgage. Refinance rates are high, so this may not be your best option.
READ MORE: Cash-out refinance vs. home equity loans
Get a Personal Loan
Your lender options will be limited because many don’t offer personal loans large enough to refinance a HELOC. These are usually fixed-rate loans that won’t require collateral. However, you’ll probably pay a higher interest rate.
READ MORE: Best personal loans for debt consolidation
Do You Qualify for a Balance Transfer Credit Card?
If your credit score is good enough, you could save quite a bit by not paying interest (but paying a fixed transfer rate) for up to 18 months.
Apply for a card with an introductory 0% APR on balance transfers, or use an offer on a card you already have. You generally have to have good or excellent credit. Typically, FICO scores of at least 690.
READ MORE: Best balance transfer credit cards
How Does a HELOC Work?
A home equity line of credit is a revolving loan. Unlike a conventional loan, you establish a home equity line of credit ahead of time and use it when and if you need it. It’s like a credit card, except with a HELOC, your home is used as collateral.
It will have an adjustable interest rate, and you’ll only pay interest on your use. The loan will have a credit limit and a set time frame, or “draw period,” usually ten years. During that time, you can continue to borrow even as you make payments. The long draw period can allow you to make home improvements over an extended period.
READ MORE: Advantages and disadvantages of a home equity loan
The Bottom Line
Whenever you consider taking out a loan or accessing your home’s equity, weigh the pros and cons of each option. Make the decision that will save you the most money and consider the most appropriate option for your household and your future.
To calculate your debt-to-income ratio, add up your monthly bills, which may include: Monthly rent or house payments. Divide the total by your gross monthly income, which is your income before taxes. The result is your DTI, which will be in the form of a percentage. The lower the DTI, the less risky you are to lenders. Banks consider an excellent debt-to-income ratio below 36% for the back end, which means that 36% of your income goes towards paying your financial obligations. Most lenders will accept up to 41%, but you will get a better rate the lower this figure is.
Yes and no. It can be tax deductible if you spend the money on improving and repairing the property. No, if you use this to pay off a high-interest credit card. There are rules on being able to deduct the interest for this. Consult your tax professional.
Closing costs for home equity loans can vary widely depending on the lender. They could range from a few hundred dollars into the thousands, depending on your needs. Check out this complete breakdown.