A
home equity line of credit, or HELOC, has two stages. First is the
draw period, which usually lasts 10 years but can be as long as 20
years. Monthly payments are applied only to the interest during the
draw period.
After the draw period ends, the second stage begins: The HELOC goes into the amortization period when you have to pay principal as well as interest. Monthly payments go up. If you still owe a lot, the payments rise abruptly. That’s why some homeowners look for ways to refinance their HELOCs. Usually somewhere between six to 12 months before the end of the draw period, banks are beginning to reach out to clients reminding them that a decision they made 10 or 15 years ago is about to come due.
There are three options if you want to cushion the amortization period of a HELOC:
Refinance the HELOC. When you refinance a home equity line of credit, you start over with a new HELOC, with its own interest-only draw period. With this approach, you still have access to a credit line to deal with future needs. You will still have to pay off the balance someday. You should remember that most of HELOCs have variable rate, and nobody knows what rates will do in theirfuture.
Pay off the HELOC with a home equity loan. A home equity loan is for a fixed amount with a fixed rate. The payments remain the same through the life of the loan.
Refinance the HELOC and the first mortgage into a new primary mortgage. By refinancing the HELOC into a new primary mortgage, you could take advantage of a fixed interest rate that’s still low by historical standards. Consider refinancing into a 15- or 20-year mortgage to reduce total interest payments.
While interest rates on primary mortgages are favorable, you have to take higher closing costs into account when you take this approach. It’s best if you keep the house long enough for the cumulative monthly savings to outweigh the costs of refinancing.
After the draw period ends, the second stage begins: The HELOC goes into the amortization period when you have to pay principal as well as interest. Monthly payments go up. If you still owe a lot, the payments rise abruptly. That’s why some homeowners look for ways to refinance their HELOCs. Usually somewhere between six to 12 months before the end of the draw period, banks are beginning to reach out to clients reminding them that a decision they made 10 or 15 years ago is about to come due.
There are three options if you want to cushion the amortization period of a HELOC:
Refinance the HELOC. When you refinance a home equity line of credit, you start over with a new HELOC, with its own interest-only draw period. With this approach, you still have access to a credit line to deal with future needs. You will still have to pay off the balance someday. You should remember that most of HELOCs have variable rate, and nobody knows what rates will do in theirfuture.
Pay off the HELOC with a home equity loan. A home equity loan is for a fixed amount with a fixed rate. The payments remain the same through the life of the loan.
Refinance the HELOC and the first mortgage into a new primary mortgage. By refinancing the HELOC into a new primary mortgage, you could take advantage of a fixed interest rate that’s still low by historical standards. Consider refinancing into a 15- or 20-year mortgage to reduce total interest payments.
While interest rates on primary mortgages are favorable, you have to take higher closing costs into account when you take this approach. It’s best if you keep the house long enough for the cumulative monthly savings to outweigh the costs of refinancing.
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