By doing a HELOC refinance you can potentially lower your interest rate, monthly payment, or both if you have a large outstanding balance as the draw period nears its end.
There are several ways to get HELOC refinancing, each with pros and cons. Let’s explore the ins and outs of a HELOC refinance and see how restructuring your home equity can benefit you and your property.
What Is a HELOC and How Does It Work?
Knowing the basics of a HELOC before applying for a refinance is important. A HELOC, short for a home equity line of credit, is a financing tool that allows you to borrow against your home’s built-up equity.
The loan term is divided into draw and repayment periods. During the draw phase, borrowers can draw cash up to a certain limit as needed. During this period, usually between 2 and 10 years, they must make interest-only monthly payments, while any extra money paid goes towards the principal.
Once the draw period ends, the borrower is no longer allowed to withdraw cash but instead is required to make monthly payments, including the interest and the principal, to repay the amount. Once the loan transitions into a principal and interest payment, many borrowers may become overwhelmed by the increased payment. To prevent this from happening, you might consider refinancing your HELOC.
What Is the Right Time to Refinance a HELOC?
While you can refinance the HELOC at any point during the repayment period, it is generally a good idea to refinance it as the draw period approaches its end. That is because your payments may rise significantly once the draw period ends and can become unmanageable. A HELOC variable rate can also add to the overall amount you owe.
A HELOC refinance is a great choice for borrowers who make interest-only payments during the draw period and have built up a large outstanding balance. It is also ideal to consider refinancing if the total project budget goes beyond your estimates or if you are planning to work on some additional projects.
What Are the Benefits of a HELOC Refinance?
A HELOC refinance helps make repayment of the loan more convenient by offering a few benefits:
Low Monthly Payments
HELOC refinancing is an effective technique for lowering your monthly payments. It restarts the draw period to give you more time before making payments (including the interest and principal).
In addition to extending loan terms, a HELOC refinance may offer you a much lower interest rate than the initial value. This can be because the HELOC rates have dropped or your credit score or income has improved.
Fixed Interest Rate
Variable interest rates may rise or drop per the market conditions and, therefore, are difficult to manage. With HELOC refinancing, you can trade in HELOC float rates for a different borrowing option with a fixed interest rate to easily predict monthly payments.
High Credit Limit
HELOC uses the market value of your property to calculate the maximum amount you can borrow. With a HELOC refinance, you can qualify for a much higher limit and access more cash if your property value has appreciated since taking out your line of credit.
RenoFi Loans: A Smart Alternative
Another smart way to increase your borrowing power is through RenoFi loans. While standard home equity loans focus on the property’s existing value, RenoFi loans are more concerned with its after-renovation value. To understand this better, let’s consider an example.
Suppose your home currently holds a value of $500,00 and an outstanding mortgage balance of $400,000. You are considering a renovation project that will boost its value to $640,000, making your current LTV 80%. In this case, your borrowing power is $0 with a standard loan. With RenoFi’s focus on your home’s projected value after renovations, you can go up to 125% LTV and borrow as much as $176,000 to fund the project.
Get started with your RenoFi loan here4 Ways to Refinance a HELOC
Refinancing your home equity line can be done in several ways. Here are the four most popular methods to pay for your HELOC:
1. Take Out a New HELOC
You can refinance your HELOC by taking a new one and rolling some or all of your previous balance into it. This method restarts the clock and allows you to reenter the interest-only payment period.
2. Pay off With a Home Equity Loan
Home equity loans can also be used to repay your HELOC. While HELOC and home equity loans use your property as collateral, they differ in other aspects. A home equity loan has a fixed interest rate instead of a variable one and provides the cash as a lump sum.
Refinancing into a home equity loan is recommended if you prefer making steady monthly payments for longer.
3. Complete a Cash-Out Refinance
A cash-out refinance provides a lump sum of funds for a fixed interest rate. It works by replacing your current mortgage with a new one and paying the difference to you in cash. While the difference can be used at your discretion, it requires payment of closing costs and fees. Additionally, ensure that you lock in a low interest rate, or you may lose money and increase your monthly payments.
4. Shift the Debt to a Personal Loan
Taking out a personal loan to pay off your HELOC is an excellent choice if you don’t want to risk losing your property. These loans are unsecured and don’t require any collateral in case of default. However, personal loans usually have much higher interest rates than traditional mortgages and can potentially lead to higher payments.
Conclusion
A HELOC refinance is the ultimate solution to prevent default during the repayment period. This restructuring of the home equity line can potentially help lower interest rates and monthly payments and extend the loan term, making it easier for the borrower to repay the loan amount.
RenoFi loans offer a great alternative if you are looking to finance major home renovation projects compared to standard home equity loans. RenoFi loans are based on the after-renovation value of your residence and offer, on average, about 11 times more borrowing power.
With our loans, you can stick with your mortgage’s low rate and make low monthly payments without worrying about refinancing your mortgage as traditional loans require.
You can explore our various loan options to find one that best suits your project needs and vision.
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