It always happens at the worst possible time. You’ve just refinanced your house, and now you’re faced with an unexpected bill. It might be a medical bill, a car that’s reached its final days or a home repair that you can’t put off any longer. You need extra cash, but you might not be sure where it will come from.
Have you wondered, “Can I get a HELOC after refinancing?” The short answer is, it depends. Never assume that you can or cannot make a financial move like this until you’ve done your research and spoken with lenders.
If you meet the lender qualifications and have enough equity after your refinance, you may be able to get a HELOC after refinancing. Learn more about HELOCs, how they work and how they relate to refinancing.
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What is a HELOC Loan and How Does It Work?
A HELOC loan is a home equity line of credit. It’s technically not a loan. Instead, you apply for a line of credit that’s based on the equity you hold in the home.
A line of credit works a bit like a credit card. You apply for a HELOC, and the lender looks at your qualifications. However, you are not cashing out all that money at once. Just like when you open a credit card, you use it as needed. If you don’t need the entire credit limit, you don’t need to access it.
One of the 1st things the lender will look at is how much equity you have in your home. Your equity is your home’s value less the amount you owe on your mortgage.
Let’s say your home is valued at $200,000. You owe $100,000 on your mortgage. That means you have $100,000 in equity ($200,000 - $100,000 = $100,000).
Lenders will typically approve you for up to 85% of your home’s value less the amount you owe on your mortgage. If your home is valued at $200,000, 85% percent of that value is $170,000. If you still owe $100,000 on your mortgage, the most you’d likely be approved for is $70,000. However, the COVID-19 pandemic has changed the way banks and lenders approach every mortgage product. Speak with your loan officer about what might be available, and shop around with help from Benzinga.
The amount you’re approved for is your line of credit, but, as mentioned previously, you determine how much of that line of credit you use.
HELOCs have 2 phases. The 1st is a draw period, which is when you can borrow (or draw) money from your credit line. You typically have a minimum payment during your draw period. The length of the draw period varies by lender but can be up to 10 years.
The 2nd phase is the repayment period. As the name suggests, this is when you’re required to pay off your HELOC, and you can no longer borrow money from your credit line. You may have higher payments during this period, which can last for up to 20 years. At this point, you may want to refinance again and roll these costs into your mortgage or simply find a better rate.
Types of Home Equity Loans
There are 3 products that borrowers use to tap into their home equity: HELOCs, home equity loans and cash-out refinances.
Here are the basic components of home equity loans and cash-out refinances.
Home Equity Loans
Like a HELOC, you borrow against a percentage of your home’s equity with this type of loan. Unlike a HELOC, you receive the funds all at once in a lump sum. You repay the loan over a set term. This type of loan typically has a fixed interest rate, which means it never changes. You have the same payment for the life of the loan.
HELOCs and home equity loans are 2nd mortgages. This means they’re secured by your home and are in second position after your primary mortgage (the loan you used to buy your home). If you stopped making payments on your home and your lender foreclosed, the proceeds of the sale would pay off your primary mortgage 1st and your home equity loan or HELOC 2nd.
With a cash-out refinance, instead of getting a 2nd mortgage, you’re getting a new primary mortgage. Your lender gives you a loan that covers your current mortgage balance plus a percentage of the equity in your home.
Let’s say you have a home valued at $150,000 and a mortgage balance of $75,000. You need $15,000 to complete home repairs. You work with a lender and get a cash-out refinance for $95,000. This covers your mortgage, $15,000 for home repairs and $5,000 for closing costs.
These are extremely popular products, and you will see quite a lot of advertising around them. Remember, however, that you only want to cash out when you have a specific idea in mind for that money. For example, you might cash out for a huge renovation, knowing that you can afford to make those payments and recover that money if you ever sell the house. You can do the same thing when you want to open a business or something of the sort. Cashing out a large sum with no plan or in a manner that makes it difficult to repay may be less than advisable.
Pros of a HELOC
Here are the benefits of a HELOC:
- Flexibility to draw funds when you need to
- Lower payments during your draw period
- No restrictions on how you use the funds
- Typically has a lower interest rate than other options like personal loans
- This sort of loan is easier to obtain because you have an existing loan product that backs it up
- They can be refinanced
Cons of a HELOC
Here are the drawbacks of HELOCs:
- They’re secured by your home, which means that if you stop paying, you could lose your home.
- They tend to have variable interest rates, which means that lenders could increase your interest rate.
- You have to pay closing costs.
- Your payments during your repayment period may be higher than you anticipated.
Things to Consider Before Picking a Home Equity Loan
Before choosing a home equity product, consider which is right for you. If you like flexibility, a HELOC might be best. If you know you need a lump sum and you want predictable payments, a home equity loan might be best. If you don’t want a 2nd mortgage, a cash-out refinance might be best.
Once you know what product you want, look at lenders. Some, like Figure, specialize in HELOCs and refinancings. Get quotes from lenders you’re interested in and compare interest rates and closing costs. Consider the service you get from the lender and choose a lender with competitive rates and excellent service.
HELOCs vs Cash-out Refinances
Considering a HELOC vs refinance? Here’s how they compare.
|2nd mortgage||1st mortgage|
|Usually has a variable interest rate||Could have a variable or fixed interest rate|
|Flexible credit line||Funds received as a lump sum after closing|
|You have to pay closing costs||You have to pay closing costs|
|Secured by your home||Secured by your home|
Frequently Asked Questions
How long after refinancing can I get a HELOC?
You can get a HELOC as soon as you qualify. If you refinanced for a better interest rate or different loan term without taking out any equity, you may qualify soon after you refinance. If you did a cash-out refinance, it depends on how much equity you took out when you refinanced.
Remember, lenders will only loan up to 85% of your home value less the balance of your mortgage. If you took out all or most of your equity when you refinanced, you might not have enough left for a HELOC.
Can I refinance a HELOC at the same time?
If you want to refinance a HELOC at the same time as your primary mortgage, you could run into difficulties, especially if a different lender holds your HELOC. You have to get permission from your HELOC lender to refinance your primary mortgage, and your lender can refuse to give permission.
Ultimately, it doesn’t hurt to ask your lender(s) and see what might work best for you, especially if you’re running into financial difficulties. For example, if you’re refinancing after divorce, explain your situation to your lenders and ask what would work best. Your lenders may be able to work with you.
Will HELOC hurt my credit?
Lenders will look at your credit score to see if you meet their HELOC requirements. In general, a HELOC will not hurt your credit as long as you make on-time payments. If you miss payments or stop paying altogether, that will lower your credit score. Otherwise, the only other way a HELOC will hurt your credit is when you apply.
When you apply for a HELOC, the lender will make a hard inquiry on your credit to learn about your credit history and get your score. This can lower your credit score, but not by much, and the effect typically doesn’t last for long.
Is a HELOC Right for You?
Even if you’ve recently gotten a refinance, a HELOC could be right for you. The best way to find out is by contacting at least 2 to 3 lenders and see if you qualify. If you do, review each quote carefully and choose a line of credit with reasonable fees and closing costs, outstanding service and a competitive interest rate.
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