A HELOC is a home equity line of credit or a loan that is tied to your home. It has a revolving line of credit meaning you can pay it off and then borrow again, similar to a credit card. However, the interest rate is usually much lower than a credit card. The interest rate usually fluctuates depending on the current market rate. Minimum monthly payments are made based on the amount you currently owe.

Facts about Refinancing a HELOC

• Refinance to a lower interest rate or do not refinance.
• When comparing loans consider the loan origination fees and choose the loan with the best package overall.
• Your credit score will need to be at least 720 to qualify for the very best rates on your loan.

What You Should Know About Refinancing a HELOC

Some people use a HELOC to refinance other debt such as credit cards or to do a home remodel. The revolving line of credit is easy to access, and allows you to borrow only what you need to complete a project. The interest rates are much lower than other types of loans; however they will fluctuate unlike traditional mortgages with set interest rates.

Some people may wish to refinance their HELOC in order to lock in a lower set interest rate. You do not need to close the HELOC when you refinance it by taking out a traditional second mortgage to pay it off. You may qualify for help with refinancing a HELOC to learn if you qualify visit www.makinghomesaffordable.gov and look for information on the second lien modification program.

Steps to Refinance a HELOC

• Contact your bank or a mortgage broker to learn what interest rates and terms you can qualify for. A good mortgage broker should be able to offer you several different loan terms and find you a good rate for your refinance. If you are not satisfied with the initial amounts shop around. However, if you have a poor credit history or if you are over-extended by your debt to income ratio being too high you may not qualify for the lowest rates currently being offered.
• Choose the loan with the shortest term with a payment you can afford to make ach month. The shorter the term, the less you will pay off in interest, but you do not want the monthly payment amount to cripple your monthly budget and make it difficult to cover emergencies and other expenses.
• Sign the paperwork and use the proceeds from your new loan to pay off your HELOC. Stop using your HELOC and consider closing it down to prevent yourself from accumulating too much debt. If you took out a new HELOC with better terms than your old HELOC then you do need to close out your new HELOC.

Warnings for Refinancing a HELOC

Most people will use a traditional second mortgage to refinance a HELOC. In “Knee Deep in Debt“ the Federal Trade commission warns that a second mortgage and a HELOC put your home at risk if you are unable to make payments. When you are refinancing, avoid adding unsecured debt into your refinance. If you were to lose your job, you could stop paying your credit card bills, and continue to pay on your mortgage and second mortgage and keep your home. But if all of your debt is tied to your home and you can no longer meet all of your monthly obligations you will put your home in danger.

Stop using your HELOC once you have refinanced it. Technically your bank may not require you to close out the line of credit once you have paid it off. Continuing to rely on it for emergencies or for other projects can drive you deeper into debt and make it more difficult to keep your home. Set up a written budget and build an emergency fund to take the place of your HELOC in the future.

Conclusion

Refinancing a HELOC is a good option if you can lock in a lower set interest rate on the money. When refinancing you should try to pay off the loan as quickly as possible without crippling your budget, so you do not make it difficult to cover your monthly expenses. When you refinance your HELOC you should stop using it and close it out so you do not continue to accumulate debt. This will allow you to pay off your home more quickly and makes it easier to sell when it is time to find a bigger house or to relocate with your job.