What To Do When Your HELOC Turns 10

December 10, 2015 - 4 min read

HELOC Payments Rising $261/Household

Feeling the pressure of a soon-to-reset second mortgage? You’re not alone.

According to Black Knight Financial Services, more than 3 million U.S. homeowners will experience a second mortgage recast within the next few years.

A “recast” is when the initial 10-year, interest-only period of a home equity line of credit (HELOC) ends, and the loan is converted to a fixed-rate, amortized loan at a new interest rate over some number of years — usually 15.

The effects of a recast can be large. The typical U.S. household will see payments increase $261 per month.

The good news is that, because the housing market is strong and because current mortgage rates are low, homeowners with an existing second mortgage are in good position to refinance.

A refinance of your second mortgage can eliminate the possibility of a recast; or, at least, stave it off for another 10-year draw period.

Your HELOC doesn’t have to recast. As a homeowner, you’re in control.

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What Is A Home Equity Line Of Credit?

A home equity line of credit (HELOC) is a mortgage with a revolving principal balance.

Typically, HELOCs are used in combination with a “first mortgage” (e.g.; 30-year fixed-rate mortgage, 5-year ARM), but not always; and loan sizes range from $5,000 to $500,000 or more.

Home equity lines of credit are different from a traditional, amortizing mortgage in that they function very much like a credit card:

  • The bank approves you for some maximum credit amount — say $100,000
  • You only pay interest on money you’ve actually borrowed
  • You can re-borrow money after you’ve paid it back so long as under your limit

HELOCs are also similar to credit cards because their interest rates are based on Prime Rate.

Prime Rate is a consumer interest rate equal to the Fed Funds Rate plus three percentage points. Your HELOC rate may be (Prime Rate + 1.00%), then; or, Prime Rate minus some amount, depending on your credit.

In general, with HELOCs, the larger your available credit line, the lower your overall mortgage rate.

This quirk in pricing can make for some interesting financial planning — especially when you’re considering an to purchase a home.

With an 80/10/10, you borrow eighty percent on a first mortgage, ten percent on a second mortgage, and bring 10% cash to closing.

Because of how HELOC price, however, you may find it makes more sense to do a 78/12/10; or a 65/25/10 instead.

A mortgage lender can help you determine which set-up will work best.

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HELOCs “Expire” After 10 Years, Usually

HELOCs offer pricing flexibility and can serve as a tool for cash management. However, like traditional first mortgages, HELOC eventually come due.

The lifecycle of a HELOC has two distinct parts.

  1. The initial draw period, where you can borrow like a credit card
  2. The repayment period, where you reduce your remaining balance to zero

The draw period typically lasts 10 years after which the remaining mortgage balance is recast to a fixed-rate loan at the prevailing market rate.

The fixed-rate period typically lasts fifteen years.

As a homeowner, you may not care about the recast, but a HELOC can be much better for your financial goals than a fixed-rate, second mortgage lien.

HELOCs are a revolving credit line. This brings liquidity and flexibility to your financial plan that a fixed-rate, amortizing loan can’t offer .

So, with your HELOC approaching its recast date, what’s the best move? Usually, you want to go look for a new HELOC via a refinance.

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What Are My HELOC Refinance Options?

A recasting HELOC will add to your household costs and reduce your financial flexibility. These are two outcomes most homeowners abhor.

So, if you’re among the millions of U.S. homeowners with a soon-to-recast HELOC, what are your options and what should you do?

Well, with mortgage rates down and home values up, you’ve got options.

Refinance your first and second mortgages

Current mortgage rates are low. If you’re exploring what to do with your HELOC, then, consider refinancing it along with your existing first mortgage.

However, you need to watch out for how you refinance.

In most situations, when a homeowner combines a first and second mortgages into a single, new loan, mortgage lender consider it to be a cash-out refinance, which may be subject to higher mortgage rates and limited by loan-to-value (LTV).

You can avoid the “cash out” classification by refinancing the two loans separately (but at the same time!); or, by rebalancing the size of your two loans to what the lender will allow.

Avoiding the cash-out mortgage refinance designation may lower your rate by 25 basis points (0.25%) or more.

Verify your new rate

Open a new HELOC with the bank

For homeowners who don’t want to refinance their first mortgage and don’t want to combine their two loans into a single, new mortgage, there’s the option to refinance the HELOC by itself.

Refinancing a HELOC can be a simple process — you can often just walk into a retail bank branch and request to make a refinance. HELOCs can close in as little as a week.

Rates are often good, too.

Based on the size of your loan and, sometimes, the amount of assets you have held at the bank, you may get access to rates below what you’ll find online.

Request a HELOC extension

For some homeowners, refinancing into a new HELOC won’t be an option.

Perhaps they’ve recently gone self-employed; or, have experienced a loss of household income; or, have credit scores which are too low to qualify.

If you are unable to get qualified for a new mortgage and you believe that a HELOC reset will harm your household finances, take time to contact your current lender as soon as possible. Lenders will often work with homeowner on an extension, if it’s needed.

What Are Today’s Mortgage Rates?

Mortgage rates are low and lenders are looking to lend. Homeowners with existing second mortgages can refinance; and homeowners in need of a new HELOC can find one.

Get today’s live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.

Time to make a move? Let us find the right mortgage for you

Dan Green
Authored By: Dan Green
The Mortgage Reports contributor
Dan Green is an expert on topics of money and mortgage. With over 15 years writing for a consumer audience on personal finance topics, Dan has been featured in The Washington Post, MarketWatch, Bloomberg, and others.