Are Equity Lines Refinanceable?
When homebuyers make down payments and pay their mortgages, they build equity or ownership in their homes over time. A home equity line of credit, or HELOC, is a type of financial product where a lender allows a homeowner to borrow money against home equity up to a certain credit limit. Debt incurred because of an equity line of credit can be refinanced.
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What is Refinancing?
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Refinancing is the process of changing the terms of debts by substituting a new debt for an old debt. When you refinance, you allow a lender to pay off an existing debt in exchange for a new one that may have more favorable terms, such as a lower interest rate or different duration. HELOCs can be refinanced just like home equity loans and mortgages.
Fixed Loan Refinancing
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A common way to refinance debt from a home equity credit line is to replace the credit line with a fixed interest home equity loan. Refinancing a HELOC with a fixed interest loan will end the line of credit. This can be advantageous if you are tempted to borrow too frequently using a HELOC or wish to have set monthly payments that do not change over time. Using a HELOC causes monthly payments to increase over time.
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Primary Mortgage Refinancing
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Primary mortgage refinancing is another method of refinancing that can eliminate a HELOC. With primary mortgage refinancing, you refinance your primary mortgage instead of directly refinancing the HELOC into a fixed rate loan. Refinancing your primary mortgage for an amount greater than the mortgage's current balance can allow you to access enough cash to pay off the home equity credit line. For instance, if you owe $20,000 on a HELOC and $100,000 on your primary mortgage, you could refinance to a $120,000 primary mortgage and use the extra $20,000 to pay off the HELOC. This method essentially absorbs the line of credit into the primary mortgage.
Benefits
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Apart from the changes in the terms of debt, refinancing a HELOC can be financially beneficial in that it may result in lower interest rates. For instance, if interest rates have fallen since you accumulated a balance on your HELOC, the rates on fixed interest loans may be significantly lower than the current rates on your HELOC. Even small differences in interest rates of a few tenths of a percent can result in hundreds of dollars of savings a year.
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