Refinancing your HELOC can offer multiple advantages

Posted by  on Sep 18, 2014

A home equity line of credit (HELOC) can be a cost-effective way to gain access to cash on demand for the equity in your home. Once the money is borrowed, though, refinancing to close out your HELOC may be a money-saving move.

A key advantage of a HELOC is that it allows you to secure credit up front but only access that credit on an as-needed basis. This means you do not have to pay interest on money until you need it. However, once you have fully accessed the credit you need, that advantage is diminished because you will start paying money on the full amount you have borrowed anyway.

At that point, a key consideration becomes that HELOCs have variable interest rates. A recent FDIC Consumer News bulletin reminded consumers that, if you have a HELOC, it is especially important to pay attention when mortgage rates start to rise because that might be a good time to refinance out of the line of credit in favor of a fixed-rate mortgage loan.

Here are some potential benefits of refinancing out of a HELOC:

  1. Lock in your interest rate. You could wait to make a change when rates start to rise, but that could risky. You have no way to know how fast or how far rates will rise, nor can you guarantee that you will be able to get a mortgage loan approved when the time comes. Now, while current mortgage rates are still well below normal, you could lock in an affordable mortgage rate by shifting your HELOC balance over to a fixed-rate home equity loan.
  2. Lower your home equity rate. Besides the certainty of a fixed interest rate, you might find a conventional home equity loan gives you better terms than a HELOC. It is worth your while to compare mortgage rates to see if you could save money by refinancing your HELOC balance.
  3. Lower your entire mortgage rate. While you are looking at refinancing, it may be worth checking whether current mortgage rates are lower than the rate on your primary loan. Refinancing both your HELOC balance and your remaining primary mortgage balance into one loan could not only lower your mortgage rate on both balances, but it could simplify your finances by consolidating both payments into one.
  4. Restructure your repayment term. Lowering mortgage rates and locking in mortgage rates are both popular reasons for refinancing, but they are not the only reasons. Another thing you can accomplish by refinancing is restructuring your repayment term. This can have a variety of benefits. If your current payments are somewhat difficult to afford, you might be able to lower those payments by lengthening your loan term. Conversely, if you are meeting your payments with room to spare, you might find that you can lower the interest rate by shortening the loan term. Run some numbers on a refinance calculator to see if you could benefit from restructuring repayment terms by refinancing your HELOC balance.

Like all financial tools, a HELOC has appropriate uses under certain circumstances. However, if circumstances change -- for example, once you have accessed all the money you need or if mortgage rates are in danger of rising -- it may be time to change tools and refinance out of your HELOC.


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