Refinancing your home-equity line of credit to avoid payment shock

Posted by  on Dec 13, 2013

Home-equity loans and lines of credit may be making a comeback as home values rise again, but homeowners with an existing line of credit from 2004 or 2005 or 2006 could be in for a surprise if they haven't looked at the terms of their loan in a few years. While home-equity loans are typically fixed-rate loans with a set term of ten or 15 years, a home-equity line of credit (HELOC) usually has an adjustable rate for the initial ten years of the loan. Not only does the rate adjust and therefore will rise along with current mortgage rates, but most have interest-only payments for the initial period of the loan. In the next few years, homeowners who have enjoyed making payments of just interest at historically low mortgage rates may find that their line of credit will reset at higher mortgage rates and with payment of both principal and interest required.

How to handle your home-equity line of credit

If you currently have a line of credit on your home in addition to your first mortgage, step one should be to pull out your paperwork to see the terms of your loan. You can also call your lender to ask for an estimate of your future monthly payments so you can see how they'll fit in your budget. Ask if you can lock in some or all of your line of credit to a fixed rate at current mortgage rates rather than wait for a potential mortgage rate increase in 2014.

One option, particularly if you have good credit and equity in your home, is to refinance your home-equity line of credit.

Refinancing a home equity line of credit

Your lender may be willing to refinance your line of credit into a home-equity loan, but you can also look into the option of refinancing both your first mortgage and your line of credit into one loan. You can start by asking your lender about your options, but you should also shop around with other mortgage lenders to see if you can get a better mortgage rate, better terms or lower fees. When you shop around for a refinance, follow these steps:

  • Check your credit report to see if you need to fix any errors or improve your credit score before you start applying for a new loan.
  • Compare mortgage rates for the same size loan, with or without points, on the same day.
  • Check out loan options with a credit union, a community bank, a mortgage banker and a national bank to see if any of them offer a loan program that fits your needs.

By taking steps and being proactive about your home-equity line of credit, you could end up saving yourself significant money.


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