Imagine this: you took out an interest-only Home Equity Line of Credit (HELOC) several years ago to cover some home renovations. You charged money for labor and materials to the HELOC during the “draw period" and have only paid interest on those charges. Because principal payments on the line balance don't have to be repaid until the "repayment period" following the draw period with an interest-only HELOC, you've not yet had to repay any of the line balance. But now that your repayment period is coming up, you realize that the monthly payments are going to be a financial stretch.
Can you refinance a HELOC to delay or reduce your upcoming payments?
In this article, you’ll learn about HELOC refinancing, including ways to refinance, reasons to refinance, and the pros and cons of HELOC refinancing.
Is It Possible To Refinance A HELOC?
Yes, it is possible to refinance a HELOC. In fact, there are multiple methods of refinancing a HELOC, including:
- Refinancing to a new HELOC. Opening a new HELOC essentially resets your draw period. You can pay off an existing HELOC in full using the new HELOC. You can opt for an interest-free HELOC to keep your initial payments low for the remainder of the draw period. You might also consider choosing a HELOC in which you pay principal and interest simultaneously. This can spread the repayment over more months, which lowers the monthly principal payment amount.
- Refinancing to a fixed-rate home equity loan. Many HELOCs have variable rates, meaning the interest rate fluctuates with changing market conditions. If interest rates are going up, you might choose to take out a fixed-rate home equity loan to pay off your HELOC and avoid higher future interest payments. This would make your monthly payments more predictable since the interest rate remains the same. As a side note, PNC Bank's HELOC features the ability to lock in a fixed rate for those who prefer to lock in their interest rate while keeping a line of credit open.
- Using a cash-out refinance to pay off the HELOC balance. If today’s interest rates are lower than your current mortgage interest rate, and you have substantial equity in your home, you might consider a cash-out mortgage refinance. This would originate a new mortgage loan on your home, which would pay off your existing home loan and allow you to access the cash needed to pay off your HELOC. Your new mortgage loan would be issued with today’s interest rates. By resetting the mortgage term, you might be able to spread your payments over more years, which could reduce your monthly payment amounts.
Additionally, some lenders may allow you to use a “loan modification” to change the terms of a HELOC without refinancing. This option may be reserved for homeowners under financial stress or those who cannot qualify for a refinance.
Reasons To Refinance A HELOC
Here are some of the reasons you may wish to refinance a HELOC:
- Your draw period is coming to a close, and you need more time before you start repaying the principal amount.
- You want to extend the repayment term over more months so that you can pay less on the loan each month.
- Interest rates have decreased, and you want to lock in the lower interest rate to reduce your interest expense.
- You are uncomfortable with your adjustable-rate HELOC and prefer a more predictable fixed-rate loan.
- Your home equity has increased, and you want to access more cash based on the value of your home.
Pros and Cons Of Refinancing A HELOC
The potential benefits of refinancing a HELOC include:
- Lower Monthly Payments. If interest rates are lower today than when your HELOC was approved, you may be able to save money by refinancing with today’s lower rates.
- More Funds. If the value of your home has increased and/or your equity in the home has increased, you could qualify for a larger loan amount and have more funds available to you.
- Increased Predictability. Refinancing a variable-rate HELOC with a fixed-rate home equity loan can make budgeting easier by keeping payments predictable.
- Deferment of Principal Repayment. By refinancing your existing HELOC with a new HELOC, you can restart the clock with a fresh draw period. This can give you more time to get your finances in order before you begin repaying the principal balance.
The potential downsides of refinancing a HELOC may include:
- Fees. Most lenders charge fees to cover the time spent processing the loan.
- Possible Prepayment Penalties. Some loans charge penalties for being paid off ahead of schedule.
- Greater Overall Interest Expense. You may add to your total interest expense if interest rates are higher on the refinance or if you extend the repayment period.
Is It Worth Refinancing A HELOC?
Refinancing a HELOC may or may not be worth it, depending on your unique financial circumstances. Invest some time reviewing what a refinance would look like in your situation. You can always contact a knowledgeable mortgage loan officer for guidance.
Steps To Refinance A HELOC
If you are interested in refinancing your HELOC, here are the steps you should take:
1. Clarify Your Goals. With so many ways to refinance, it’s important to determine what you most want to get out of the refinance. You may wish to speak with a local loan officer who can provide guidance on which refinancing method would help you achieve those goals.
2. Meet the Minimum Requirements. Qualifying for a HELOC or HELOC refinance may require a minimum credit score, debt-to-income ratio, and amount of home equity.
3. Gather Your Financial Records. Depending on your situation, you may need to provide proof of income and assets through records like tax returns, pay stubs, and bank statements.
4. Submit Your Application. Your loan officer can guide you to the appropriate application based on your chosen refinancing method.
PNC Bank Is Here To Help
With a wide range of home loan products and competitive interest rates, PNC Bank is ready to help you refinance your HELOC or find another solution to meet your needs. Call us at 888-629-8759 or contact us online today!
The property securing the CHELOC must be located in a state where PNC offers home equity products. PNC does not offer the CHELOC product in Alaska, Hawaii, Louisiana, Mississippi, Nevada and South Dakota.