Time may be running out on your HELOC. This does not have to be a crisis, as long as you are prepared.
HELOCs were very popular during the housing boom, which peaked about a decade ago. Given that a typical HELOC term is 10 years, that means that many homeowners have a HELOC about to expire. In some cases, simply rolling over to a new HELOC may be the best option, but you won't know that until you have taken a fresh look at your situation.
So, to be prepared, here are seven steps to take if you have a HELOC about to expire:
1. Estimate Current Level of Equity
Ideally, you will have more equity now than you did 10 years ago, but if you have borrowed heavily against your equity or if your area was especially hard hit by the collapse in housing prices, that may not be the case. Knowing how much equity you have – specifically, how well it covers the amount you owe on your HELOC – will give you an initial idea of whether you have the option of extending or refinancing your HELOC.
2. Check Your Credit Score
As with assessing your equity, checking your credit score is all about seeing what kind of flexibility you have to deal with a HELOC about to expire. A decade ago, lenders were playing fast and loose with extending credit; today, not so much. Unless your credit is in decent shape, your options for refinancing or extending your HELOC may be limited.
3. Research the Current HELOC's Repayment Terms
Some HELOCs require payment in full when the line of credit expires, while others spread repayment over a specified period. It is important to know whether you are facing a lump sum repayment or a series of monthly payments. This will allow you to figure out whether your savings and income will allow you to readily repay the loan, or whether you need to restructure it somehow.
4. Assess Your Ongoing Need for Credit
Besides deciding how to repay what you currently owe, you should also determine whether you still need ready access to this kind of credit. This will help you decide whether to try to extend the HELOC or refinance it with a fixed-term loan.
5. Compare Refinancing Options
Even if your current HELOC gives you time to repay, you should look to see if refinancing into a home equity loan or with a cash-out refinance of your primary mortgage would be advantageous. Besides comparing interest rates for these various options, keep in mind that your HELOC may involve adjustable interest rates over the repayment period, while refinancing gives you the option of locking in a mortgage rate while they are still very low.
6. Shop Around for Mortgage Rates
When you have decided on the best method of financing beyond your current HELOC, get competing quotes from lenders to see which offers the most competitive terms for the type of financing you need. Don't simply settle for what your current loan servicer has to offer – check the marketplace first to see if you can do better.
7. See What Your Current Loan Servicer Can Do for You
Once you have looked into all your options, then it is worth seeing if your current loan servicer can offer you something better. If you have an excellent payment history, your current servicer might be willing to offer you a more attractive interest rate or a break on closing costs. If your credit history is a little shaky, your current servicer will be more motivated than a new lender to see if there is a workable way for you to repay what you already owe.
It may seem an inconvenience to have a line of credit that has been available for the past 10 years now on the verge of expiring, but look at the bright side. This is happening at a time when mortgage rates are low and housing prices have largely recovered. This gives you more options to extend your HELOC, refinance, or simply pay off your balance. In other words, you can choose the financing method that suits your needs and circumstances now, rather than continuing with a choice you made a decade ago.