4 options to consider when refinancing a home equity line of credit
A home equity line of credit (HELOC) is a financial tool you can use to access the equity built up in your home. If it’s time to repay your HELOC or your financial situation has changed, it might be time to consider a refinance. You may be motivated to refinance if:
- You want to lower your monthly payments – If refinancing can lower the interest rate, your payments could be more affordable. This may make sense if your repayment phase is nearing and you are about to go from making interest-only payments to significantly larger required payments of principal and interest or you’re facing a balloon payment.
- You want to give yourself more time – By adjusting your HELOC’s repayment terms, you could lengthen your draw period and delay the costlier repayment period or balloon payment.
- You want to access more cash – If your home has increased in value or you’ve paid down the principal significantly (or both) since you opened the HELOC, your home equity may have increased. Refinancing may allow you to borrow against that extra equity, giving you additional cash.
- You want a little more stability – HELOCs often come with a variable rate. That means your monthly payments can fluctuate based on the interest rate. Refinancing into a fixed-rate loan offers more predictable monthly payments.
What refinancing options are available?
1. Get a new HELOC
Pros
- You can delay the repayment phase, giving you more time to prepare for higher payments or the balloon payment.
- If your credit score has improved or the value of your home has increased (lowering your loan-to-value), you may qualify for a lower interest rate.
- Opening a new HELOC could have lower refinancing costs than options like getting a traditional home equity loan or doing a cash-out mortgage refinance to pay off the HELOC.
Cons
- Extending the draw period could be more expensive in the long run since you may pay more interest.
- Your monthly payments may vary based on the change in interest rate or the amount drawn.
- Your interest will not be deductible since you are using the money to pay off your original HELOC. You can only deduct a HELOC’s interest when you use the money to buy, build, or substantially improve a home. Consult a tax advisor for more details.
Refinance with First Federal by May 31, 2024, to lock in our low introductory rate for 12 months on your new HELOC.
*Introductory rate offer not available for refinances of existing First Federal Bank of Kansas City Home Equity Lines of Credit.
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Refinance with First Federal Bank
2. Get a home equity loan to pay off your HELOC
Pros
- Home equity loans typically have fixed rates, which eliminates the worry of your rate rising.
- With a fixed interest rate, you get a fixed monthly principal and interest payment – making it easier to plan your monthly budget.
- You may be able to get a longer repayment term which could lower your monthly payment.
Cons
- You could have higher closing costs and fees compared to a HELOC.
- There is no interest-only payment period like with a HELOC. You’ll start making the larger (principal and interest) payments immediately.
3. Get a cash-out refinance on your first mortgage to pay off your HELOC
Pros
- If your home’s value has increased, you may be able to pay off your HELOC and have additional cash to use for whatever you need.
- If you use the additional cash for a home improvement project, you may get a tax deduction on the interest you pay. Consult a tax advisor for more details.
- This streamlines your monthly bills since you can roll your HELOC and first mortgage into a single loan payment.
- By combining your HELOC and your first mortgage, you could possibly reduce what you pay each month.
- You could get a fixed interest rate, eliminating the fluctuation in principal and interest payments.
Cons
- The refinance could reset the term of your loan which could lengthen the time it takes to pay off your mortgage.
- If the loan resets, you could end up paying more in interest over the life of your mortgage.
- Most likely, you will have higher closing costs and fees compared to choosing a HELOC.
4. Get a personal loan to pay off your HELOC
Pros
- You could get a fixed rate and set monthly payments.
- A personal loan is unsecured, meaning you don’t have to put up your house as collateral.
Cons
- If you have a lower credit score, a personal loan could have a higher interest rate than other options like a refinance or a home equity loan.
- Personal loans may have origination fees and prepayment penalties.
- Personal loans generally have lower loan limits and shorter loan terms.
For more information on HELOCs, check out these FAQs or contact our consumer lending team.
