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Should you refinance a home equity loan?

Posted by  on Jun 12, 2012
 

Before the housing bust many homeowners were able to convert some of their home equity to cash relatively easily. One popular way to cash in on equity has been to borrow a home equity loan of home equity line of credit (HELOC). But eventually home equity loans must be repaid and they often have a large balloon payment at the end of the term. If you are facing a looming balloon payment on a home equity loan, you may be wondering where you are going to get the money and if it is possible to refinance the loan.

Keeping your home

Not paying off the balance of a home equity loan or HELOC could cause you to lose your home. That's because when you borrow take a home equity loan, your house is used as collateral. Having a second mortgage and not paying it back could result in the bank foreclosing on your property.

Principal and interest payments

So why do many home equity loans have a balloon payment at the end of the term? When the home equity loan is set up the minimum payments may only cover a portion of the principal and the accrued interest. The money going toward the principal may not actually be enough to pay off the full balance at the end of the term, resulting in a balloon payment.

Other loans or HELOCs may be structured so that the monthly payments only go toward interest. That means none of the principal is being paid down unless you take it upon yourself to make extra payments each month or from time to time. For example, if you borrow $20,000 with a home equity loan and the monthly payments only go toward interest, you are still going to owe $20,000 at the end of the term.

Paying off the balance

It can be nervewracking to be faced with a balloon payment of thousands of dollars. Coming up with a large sum of money isn't always easy but there are some possible solutions.

  • Use a lump sum of cash to pay off the home. The money could come from a savings account, selling off investments, or even an annual bonus.
  • Refinance your home equity loan. The lender may be willing to refinance your loan, but be prepared for a higher refinance rate than you currently have if interest rates have risen since you originally borrowed money. Depending upon how much home equity you have in the property, you may be able to refinance the mortgage and roll the balance of the home equity line into it.
  • Get another type of loan to pay off the HELOC or home equity loan. The money could come from a personal loan, which would be guaranteed by your signature, or some other type of loan. But given the current lending climate it may be tough to qualify if you already have a high debt-to-income ratio.

Keep in mind that if you sell your home, the home equity loan will likely need to be completely repaid. The money can come from the proceeds from the sale, but if you don't make enough profit you may have to scramble to come up with the cash.

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