Refinancing a HELOC: understanding your options

February 28, 2022

By Jamie Smith

Refinancing a HELOC: understanding your options

A couple is renovating a home after refinancing a heloc

Refinancing a home equity line of credit (HELOC) can help you save money on interest and give you some extra time to pay your debt. A HELOC is a revolving line of credit that's a lot like a credit card. It has lower interest rates, and the equity in your home secures it. With a home equity line of credit, you can get the money you need for unexpected expenses, home renovations, or even a family vacation, and you'll always have the option to refinance. Here's what you need to know about how HELOCs work, the benefits of refinancing, and the steps involved.

How HELOCs work

The equity in your home secures a home equity line of credit. Equity is the difference between the current value of your home and the amount you have left to pay on your mortgage. If you bought your home with cash and no mortgage, your equity is the current market value. At Alliant, you can borrow up to 90% of your home's equity.

Each HELOC has a draw period and a repayment period. During the draw period, you can withdraw as much money as you need until you reach your credit limit. You can make minimum payments and borrow more if you need it.

With an interest-only home equity line of credit (HELOC-IO), you'll only need to pay for interest during the draw period. However, you can expect an increase in your payments when the draw period ends and the repayment period starts. During the repayment period for both products, you won't be able to borrow any additional money.

The benefits of refinancing

Refinancing after a HELOC's or HELOC-IO's draw period is over can lower your payments, improve your interest rate, and give you more time to repay what you borrowed. You could even qualify to borrow more. Home values increase over time in many neighborhoods, and a higher home value can raise the amount of equity in your home and your credit limit.

Refinancing is an especially good idea if your credit score has improved a lot since you first applied for a home equity line of credit because a credit higher score can help lower your interest rate. If you get another HELOC, you also may not need to pay appraisal or closing fees; for example, Alliant won’t charge those fees as long as you borrow less than $250,000.

How to qualify for refinancing

Before you refinance, you'll have to qualify based on your debts, assets, income, and expenses. You may need to provide pay stubs, tax returns, mortgage statements, proof of insurance, a driver's license or other photo ID, and/or other documents. For the lowest interest rates, you'll need a FICO credit score in the very good to exceptional range, which is above 740. With a lower credit score, you may need to pay more interest. People with more unused equity in their homes, even after refinancing, tend to pay lower interest rates as well.

To raise your credit score and save on interest after you refinance, make all your monthly payments on time and pay down credit cards and other debts as quickly as possible. If you don't use some of your credit cards, keep the accounts open anyway. Your available credit is an important part of your credit score, and unused cards can help keep it high.

Understanding your refinancing options

There are many different ways for you to refinance your HELOC or HELOC-IO, and they all have pros and cons. Here are some of the options available:

Getting a new HELOC

Getting a new HELOC can be a good idea if you didn't borrow up to your credit limit with the old one. You can lower your payments and give yourself more time to take care of your debt, which could improve your financial situation. However, taking more time to pay your debt often means you'll pay more in interest over time. You could also have a higher rate than you did with your first HELOC.

Fortunately, there are no penalties or fees for paying off your home equity line of credit early. You can also keep your payments low and minimize interest expenses by resisting the temptation to borrow more money from your new HELOC.

Getting a home equity loan

You can turn your variable-rate HELOC into a fixed-rate or adjustable-rate home equity loan or second mortgage. This lets you pay off your HELOC with a lump sum and then make payments with a lower interest rate that won't increase in the future. With a variable rate, the interest rate can change with the financial market. Higher rates mean paying your debt will take longer, and lower rates help you finish making payments faster.

With an adjustable rate, the amount due each month can change with the interest rate, but the term of the loan stays the same. A fixed rate is the best option for most people because it gives them a chance to lock in a low rate.

Getting a new first mortgage

If you still have a mortgage on your home along with your HELOC, you can refinance both of them into a new first mortgage. Choosing a first mortgage gives you the lowest interest rates available, and you'll only need to make one payment every month instead of two. However, your closing costs may be higher than they would be if you only refinance your HELOC.

Refinancing your HELOC or HELOC-IO can make your payments easier and help you save money on interest. If you have enough equity in your home, you can even borrow more.

Unlock the value of your home

An Alliant HELOC could help you get the funds you need when you need it. Pay for a home renovation, vacation home and more.


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