Home equity lines of credit – also known as HELOCs – are favored by many homeowners because they give you the flexibility to borrow money when you need it. However, they also have a downside. During the repayment period, your monthly payments can often raise dramatically, causing some homeowners to have sticker shock.
If that happens to you, don’t worry. There are solutions available. We’ve laid them out for you below. Keep reading to learn what you can do to make your payments more manageable.
How HELOC’s work
For the most part, home equity lines of credit work similarly to a credit card in that they allow you to borrow against the equity in your home whenever you need it. Except, rather than paying down the balance every month, repayment on an HELOC is split up into two distinct periods.
Those two periods are as follows:
The Draw Period: The draw period on an HELOC usually lasts for 10 years. During this time, you can borrow money when needed, up to the the limit given to you by your lender. You also only have to worry about making payments on the interest on your loan.
The Repayment Period: After the draw period ends, you enter the repayment period. At this point, you won’t be allowed to borrow any more money. However, you will be expected to start making payments on both the principal and interest of your loan.
What to do when your payments go up
Homeowners can often find themselves shocked when they hit the repayment period on their HELOC. Once you start having to make payments on both the principal and interest, you may see your monthly payment rise dramatically. If you’ve found yourself in this situation, don’t fret. There are options available to help you keep your head above water.
The best thing to do is to plan ahead. When you take out the loan, you know when the draw period will end. Start setting money aside ahead of time to help you handle those bigger payments.
If that amount of saving is not possible, know that it is possible to start paying down your principal early. If you can, work to make bigger payments than necessary so that you’re not stuck with as much debt after the draw period is over.
Refinance your loan
For those who aren’t aware, refinancing your loan means that you essentially take out a new loan in order to pay off your old one. In this case, there are three different options for how to refinance.
Refinancing to a new HELOC
Refinancing to a new HELOC essentially resets the time on your draw period. It allows you to continue borrowing money for another ten years. However, if you’re not careful, you could find yourself in a similar situation a couple years down the line. Be sure to make a plan for how you’re going to repay the loan once your new draw period ends.
Refinancing to a home equity loan
If you’d prefer steadier payments, you may benefit from refinancing to a home equity loan. These loans are often referred to as a second mortgage because it functions in much the same way. You’re given the money to pay off your HELOC in one lump sum. Then, you pay off the new loan in regular, monthly payments.
Doing a cash-out refinance
In a cash-out refinance, you borrow more money that you currently owe on your home’s mortgage and the excess is given to you in cash. You can use that cash to pay off your HELOC. Then, you make slightly higher payments on your new mortgage in order to compensate for the difference.
Ask for a loan modification
If you’re unable to refinance your loan, you can always ask your lender for a loan modification. In a loan modification, the lender either extends the term of the loan and/or lowers the monthly payment in order to make paying back the loan easier. However, it’s up to the individual lender whether or not they want to agree to the loan modification so there are no guarantees.