Mortgage

Do you have to use a money out refinance to repay a HELOC or residence fairness mortgage?

Refinance two loans into one

If you have a home equity line of credit (HELOC) or home equity loan, you have likely considered refinancing them into a loan using a payoff refinance.

You're not alone.

Freddie Mac said more than $ 200 billion in home equity was raised to consolidate second mortgages in this decade alone.

The mortgage rates are low, and it might be a good time to swap that home loan for a new low fixed rate. Here is how.

Shop tariffs for your cash-out refinancing. Start here. (December 5, 2021)

In this article (continue to …)

Can you use a cash out refinance to pay off a HELOC?

Yes sir. In fact, thousands of homeowners are paying out HELOCs with cash out refinances every year.

Many choose refinancing as a HELOC repayment option because they fear that their floating interest rates will suddenly explode as they are likely to be based on the current key interest rate.

However, the key interest rate has been at a historically low level since the early 2000s and is likely to remain relatively low in the years to come.

Additionally, many homeowners are on the verge of becoming their HELOC 10, which will move them from paying just interest to a fully amortized payment. Plus, the rate could go up at this point as well. It's not uncommon for the payment to double.

The possible solution? A cash-out refinancing.

Lenders have no restrictions on how you can use proceeds from a cash out refinance.

Fortunately, mortgage lenders have no restrictions on how you can use the proceeds from a cash-out refinance. This means that you can use the proceeds to pay out a HELOC just as easily as you can deposit the lump sum into your bank account.

When you close, your trust company simply cuts one final payment to your HELOC lender (assuming you have enough equity) and you never have to make two monthly mortgage payments again.

Check your HELOC Consolidation Refinancing Eligibility. Start here (December 5th, 2021)

Consider paying off a HELOC with an interest- and term-related refinancing

Paying back a second mortgage is sometimes viewed as a rate-and-term refinancing rather than a cash-out refi. This can be a beneficial repayment option, as interest and term refis come with lower rates and fewer restrictions.

Here are the prerequisites if you want to pay off a HELOC with an interest and term-dependent refinancing instead of a cash-out loan:

The new loan is a conventional / compliant loan issued by a Fannie Mae or Freddie Mac approved lender. The HELOC or home equity loan was used to purchase the propertyThe entire HELOC loan balance was used for the purchaseNo additional drawings made against HELOC / second mortgageYou can provide a settlement / final statement for the home purchase

In short, you can qualify for Interest-On-Term status if you've used an 80-10-10 piggyback loan. The only reason you have a HELOC is because you funded the original home purchase.

HELOC calculator

You may be wondering if you can save money by refinancing two mortgages to one loan.

Find out in three steps:

Calculate the pure interest payments for your existing HELOC using this formula: (Current HELOC balance) X (Interest rate is displayed as a decimal number (i.e. 5.25% = 0.0525)) / 12 – For example, $ 50,000 x 0.0525 / 12 = $ 218.75 / month. Add this amount to your current first mortgage payment including taxes and insurance refi in the Down Payment field)

Now you know if you can save money by consolidating your HELOC into a new fixed rate loan.

While these calculations show you whether or not you are saving money, keep in mind that once the Interest Period ends and the interest rates adjust, the payment on your HELOC may also increase.

Risks of Cash Out Refinancing Your First and Second Mortgages

Paying back a second mortgage through a cash-out refinancing is not without its risks.

Mortgage prepayment penalties

You should check the loan terms that you agreed to on both your first mortgage and HELOC before you overpay off on the refinance. Either or both of these loans may contain clauses that impose prepayment penalties. Most lenders don't include them, but some do.

Usually these penalties fizzle out after a few years. After five years, they rarely have much (or no) bite.

Inquire with your mortgage advisor if and when there will be prepayment penalties.

HELOC or home equity loan penalties

For HELOCs, these penalties are known as early closure fees. And they're most likely to be a nuisance if you've recently signed up for your loan.

In short, if you haven't just taken out your first or second mortgage, then chances are you're using a cash out refinance to pay off a HELOC.

If either or both are very recent, you need to determine the exact cost and incorporate it into your calculations. In some cases, they can undermine the economic basis of a refinancing.

Influence of mortgage rates

You need to compare the interest rates currently available with those you already have. In an environment of rising interest rates, it is more difficult to get a lower interest rate without affecting the term of the loan (ex.

The exception could be if you are now a “better” borrower than you were when you originally borrowed: with a higher credit rating, more equity, or a stronger income / debt picture.

Installments versus Payments: What is Your Refinancing Goal?

Cash-out refinancing isn't cheap and you may not get a lower interest rate than your current first mortgage. However, your monthly payment is likely to be lower than your mortgage and HELOC payments combined. Spreading out a 5 year amortization schedule over 30 years will likely accomplish this.

However, you need to make sure that your new payments are affordable. So, get a quote and use a payment calculator to get an accurate idea of ​​what to expect.

You also need to keep track of your total borrowing costs: any loan fees, such as

Understand that if you extend the repayment of your home loan, you will likely pay more interest in the long run, even if you get a lower interest rate as a result of the refinancing. You are trading a lower payment today for a higher cost tomorrow. There's nothing wrong with that as long as you are aware of it and go into your loan with both eyes open.

Shop tariffs for your cash-out refinancing. Start here. (December 5, 2021)

Alternatives: refinancing into a second HELOC or home equity loan

Before you commit to paying off a HELOC with a cash out refinance, there are a few alternatives you should explore.

You may be able to refinance the HELOC yourself, either into another HELOC or into a home equity loan with a fixed rate and payment.

Both HELOC repayment options usually have the advantage of lower acquisition costs and less effort than cash-out refinancing. But they will likely come with higher interest rates. So do the math before making your choice.

This is how the HELOC repayment works

HELOC is an acronym that stands for Home Equity Line of Credit. It is a form of the second mortgage, i. H. You have placed your home as collateral for the loan. And you could face foreclosure if you default on payments.

There are many types of HELOCs with varying repayment terms – 15 years is popular. The loan has a drawing period followed by a repayment period.

Draw Period

During this initial drawing phase, which can be 10 years, you can take out as much of your credit line as you want, up to your limit. You pay back the amounts you have chosen and can borrow again up to this limit as long as you are in the drawing period.

In this way, a HELOC is similar to a credit card. Instead of paying off the main balance of a credit card or making minimum payments every month, all you have to do is pay interest on your balance during the HELOC draw period. For example, the monthly interest payments for a HELOC of 6% with a balance of $ 25,000 are $ 125 per month.

Repayment period

After the withdrawal period has expired, the repayment period of your credit line begins. Suddenly you can no longer borrow your HELOC. And you have to repay the entire loan amount over the remaining term of the loan. After your 10 year draw period has expired, you may have five years to pay off your loan balance.

Many borrowers find their HELOC repayment period financially challenging, especially with only a 5-year repayment period to pay off the entire loan amount. For example, for this $ 25,000 6% loan, your monthly loan payment increases to $ 483. Provided the interest rate doesn't rise.

Withdraw HELOCs with a withdrawal refi FAQ

Do you have to pay off a Heloc when refinancing?

Although this depends on the loan terms of your HELOC, many borrowers require their second mortgage lender's approval before they are allowed to refinance their first mortgage loan. If your HELOC lender disagrees, you will need to settle any outstanding amounts on your HELOC prior to refinancing.

What is a cash out refinancing?

A cash-out refinance replaces your current mortgage with a larger one. You will receive the difference in cash after paying your mortgage costs. Many choose to use the increased cash flow to start a new business, pay tuition fees, add to investment portfolios, cover medical bills, finance home improvement and renovation jobs, or pay off other debts such as outstanding credit card or personal loans.

What is considered home equity?

Your home equity is the amount by which the current market value of your home exceeds your current loan amount. However, don't expect to be able to borrow all of your home equity unless you have a Veterans Administration (VA) loan. Most lenders limit the borrowing that is secured on your home to 80% of your home value, even though the Federal Housing Administration allows 85% of FHA loans.

Apply for your HELOC consolidation loan

If you have adequate equity and credit, using a cash out refinance to consolidate a HELOC is probably easier than you think.

Buy the latest interest rates from top lenders and begin your goal of finally retiring that home loan.

Confirm your new plan (December 5, 2021)

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