When the initial stage of your Home Equity Line of Credit (HELOC) comes to an end, you could be facing a large increase in your monthly payment. Luckily, you have options.
An HELOC has two stages. The initial draw period typically lasts 10 years, though it can stretch for as long as 20 years. During this time, you make a relatively small monthly payment that covers only the interest.
During the second stage, known as the amortization phase, your minimum monthly payment includes both the principal and the interest. This causes a considerable spike in the monthly check you need to cut.
Luckily, you can delay the payment increase by refinancing your HELOC loan with one of these three options:
Refinance Your HELOC
By refinancing your HELOC, you’ll start over with a new HELOC. With this option, you’ll still have to pay off the balance someday. But for the time being, you’ll continue to enjoy the interest-only draw period.
Why would your choose to refinance? Because nearly all HELOCs are variable rate, meaning they fluctuate based on current interest rates. It’s impossible to know what rates will be in a year. If they drop considerably, the overall cost of your loan will also decrease.
Pay Off Your HELOC with a Fixed-Rate Home-Equity Loan
By taking out a home-equity loan with a fixed rate, you’ll be able to pay off your HELOC and enjoy a consistent monthly payment through the lifespan of your loan.
Refinance Your HELOC and First Mortgage into a New Primary Mortgage
Refinancing both your HELOC and first mortgage into a new primary mortgage loan would allow you to take advantage of today’s low fixed-interest rate.
The drawback you’ll face is higher closing costs. In comparison, most HELOCs have significantly lower closing costs than primary mortgages.
Regardless of which option you take to refinance your HELOC, it’s worth noting that qualification standards have become stricter since 2008. In order to protect both borrowers and lenders, a more in-depth analysis is performed of your trustworthiness as a borrower.
Interested in learning more about your options? Contact Rob today to learn more.