You are likely aware that you can refinance a mortgage. Refinances of primary mortgages are fairly common as homeowners seek to restructure their payments, capitalize on better interest rates, or consolidate debt. However, many people are unaware that a Home Equity Line of Credit (HELOC) can also be refinanced, for these and other important reasons.
Should I consider a home equity line of credit refinance?
Look into a HELOC refinance if the following conditions apply to you:
- You are nearing the end of your HELOC's draw period and want to continue having access to borrowing.
- Interest rates are better now than they were when you got your current HELOC.
- You want to focus on repaying your outstanding loan balance as quickly as possible with favorable loan rates and terms.
- You are feeling pressured by increased HELOC payments as interest rates adjusted or you need to begin repaying principal because you are at the end of your draw period.
- Your home's value has increased since your original HELOC and you need a higher credit line to consolidate bills or finance a new project.
- You want a HELOC with more favorable terms and payment options, or with a bank you trust or already have a relationship with.
Here are some important considerations to determine if a HELOC refinance is right for you.
Interest Rate on Your Current HELOC and a New HELOC
A common reason to refinance a Home Equity Line of Credit is to obtain a more favorable interest rate. Some reasons are:
- Move from an adjustable rate to a fixed rate. If your current HELOC does not have a Fixed Rate Lock Option, you may want to refinance with a Bank that does offer that product feature. The Fixed Rate Lock Option allows you to lock in all or a portion of your current balance at a fixed rate and term. It essentially converts the balance into a fixed rate installment loan with predictable monthly payments of principal and interest. It still allows you to borrow funds at the variable rate up to your maximum approved credit limit.
- Lower the interest rate. Depending on when your HELOC was obtained, your current rate or percentage over or under Prime Rate, may be higher than the rates available now. A lower annual percentage rate (APR) will lower the amount of interest you pay each month and over the life of the line. More favorable variable rate terms will also mean lower interest payments, even if the rate is still tied to the Prime Rate.
HELOC Refinance to Obtain an Extended Draw Period
Home Equity Lines of Credit contain a Draw Period, usually 10 years, during which you can write a check or transfer funds online to borrow money up to the maximum amount your line allows. Homeowners typically use these funds to cover major expenses such as home renovations, major purchases, or to finance the gap of funds needed for higher education.
Many homeowners have withdrawn, repaid, and withdrawn again from their HELOC over that decade. However, at the end of the 10 years, they do not want to lose the access to that flexibility as their HELOC then enters the repayment period for the next 20 or so years. During the repayment period, there can be no more draws, and you must focus strictly on repaying the amount you borrowed. If you had chosen an interest-only payment option in the Draw Period, the monthly payment requirement will be increased in repayment as the payment becomes both principal and interest.
If you want to continue to be able to draw from your HELOC, a Home Equity Line of Credit refinance is a good option. A refinance is closing your old HELOC and opening a completely new line of credit, which resets the draw period and all other terms of the loan. This can be done if you have an existing balance or if you don’t currently owe anything. If you refinance a HELOC, you will renew your ability to borrow funds for another 10 years.
Refinance a HELOC to Lower Your Payments
If your HELOC was opened in 2009 or earlier, and you had a 10-year Draw Period, you are either already in the amortization period of principal and interest repayment, or about to enter it. During the draw period of the HELOC’s first 10 years, you could choose to make interest-only payments every month.
Once those 10 years pass, you must make principal and interest payments for the next 20 or so years (depending on your bank). That means that your monthly payments will dramatically increase, often doubling or more, depending on the amount of your unpaid balance.
Many people find that their monthly budget is strained by the increased principal and interest payments. A Home Equity Line of Credit refinance will allow you to continue to make interestonly payments for another 10 years, keeping your payments low. Keep in mind, however, that you will need to pay back the principal eventually, so a refinance only postpones your inevitable repayment. You may be in a better financial position in a few years, however, after large expenses such as college tuition have ended. At Santander, you also have the option to switch from electing interest-only payments vs. principal and interest payments every 12 months.
HELOC Refinance to Access Additional Equity
If your home's value has increased significantly in the past decade, you will likely have greater equity in your home than you had when your original HELOC was granted. This is especially true if you used HELOC funds to make improvements on your home, which also increased its value. A HELOC refinance will give you access to that newly accumulated equity to borrow against by providing a higher credit limit.
Before You Refinance a HELOC, Do These Things
- Calculate the existing equity on your home. You can do this by looking at your home’s current assessed value or by, looking at the sales price of comparable homes in your area by using an online valuation tool like Zillow). Don’t forget to subtract the balance on your current HELOC from your home’s value. Most banks will lend 80% of the current market of your home minus the current balance of your mortgage, if you have one.
- Contact a lender about underwriting standards. A lot has changed in home equity loans after the residential mortgage crisis of 2008. If you haven’t gotten a mortgage or HELOC since then, you may be surprised at the amount of documentation required to refinance a HELOC. Additionally, underwriting standards for HELOCs have changed, and you must be able to afford a principal and interest payment on the HELOC, along with your primary mortgage and other debts, to qualify. Don’t assume you will automatically be approved for a HELOC refinance as qualifications are not only based on the amount of equity in the home.
- Compare costs of refinancing. Some Bank HELOCs have application fees, appraisal fees, or closing costs, while others may not.
What Documentation Do I Need to Refinance a Home Equity Line of Credit?
While each lender’s requirements may vary, here are some items you will need on hand in order to do a Home Equity Line of Credit refinance:
- Personal information for you and your co-applicant.
- Full legal name, Date of Birth, Social Security number.
- Current address. You’ll also need your previous address if you’ve lived at your current address for less than two years.
- Current employer, including their address and phone number where your employment can be verified. If you have worked at your employer for less than two years, you’ll also need to provide this information for your previous employer.
- A Government-issued photo ID, such as a Driver’s license, US passport or state-issued ID.
- 2 Most recent paystubs, showing current and Year-to-Date earnings (if applicable).
- Two years of W2s and federal tax returns.
- If self-employed, you will need both your personal and business tax returns.
- If you receive social security, disability, or pension income, you will need copies of those award letters in addition to proof of receiving the payments.
- Copy of a recent tax bills showing property taxes paid.
- Copy of your homeowners insurance policy.
If you are considering refinancing your HELOC, talking with a banker at your local branch is a good place to start. At Santander, we are here for you.
Santander Bank does not provide financial, tax, or legal advice and the information contained in this article does not constitute tax, legal, or financial advice. Santander Bank does not make any claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained in this article. Readers should consult their own attorneys or other tax advisors regarding any financial strategies mentioned in this article. These materials are for informational purposes only and do not necessarily reflect the views or endorsement of Santander Bank.