According to the Financial Post, rising interest rates aren’t good news for some home equity borrowers. Those with fixed-rate home equity loans won’t feel the difference. But, those with a variable rate home equity line of credit may see their rate go up.
HELOC borrowers near the end of their draw period may be especially vulnerable since a higher rate could come as their repayment period brings a higher monthly payment.
If you’re a homeowner who borrowed against the equity in your home, you might want to think about paying your loan off sooner rather than later, regardless of how you borrowed.
These tips can help you do just that.
Do You Have a HELOC or Home Equity Loan?
If you aren’t sure which type of home equity loan you have, just contact your lender. You likely have a home equity loan if you received a lump sum when you borrowed and make the same payment amount each month. If you can take draws against a line of credit or could at the start of your loan, you have a HELOC.
Prepayment rules can differ slightly, so knowing how prepayment works for your loan type is essential.
Also, if you have a HELOC, a prepayment may differ depending on whether you’re in the draw period or repayment period of the HELOC.
HELOC Draw Period vs. Repayment Period
During the HELOC draw period, you can pull money as you need it from your credit line. HELOCs mostly have a draw period of 10 years. You usually make minimum payments on the funds you draw, sometimes only paying the interest owed each month.
Once the draw period ends, your HELOC moves into the repayment period. You can no longer pull any additional funds from the line, and you must begin paying back principal and interest.
Your monthly payment may go up considerably from what you were paying during the draw period, depending on how much you owe when the draw period ends.
Unless you got a HELOC with a fixed rate for the repayment period, your interest rate is still variable during the repayment phase.
Also, the repayment period usually lasts for at least ten years and sometimes as long as 20. If you want to avoid those higher payments for that length of time, paying down your HELOC as fast as possible will save you from that.
For this reason, it is wise for anyone with a HELOC to know precisely when their draw phase ends so they are not hit with an unaffordable monthly payment at the end of the draw period. The more you can repay during the draw period, the better.
Getting out from under the HELOC altogether is even better. Talk to our financial advisors to discuss your options.
Ways to Pay Off Home Equity Loans Faster
If you’d rather not have that equity payment hanging over your head, these home payment strategies can help you get rid of that equity loan faster or at payments more affordable.
Put More to Your Principal
If you have a HELOC and are still in the draw period, the best way to pay it down faster is to put as much money toward the principal each month.
Anything you pay over the minimum payment, especially if that minimum only includes interest, will reduce the amount of interest you’re accumulating and the amount you owe.
Look for places in the budget where you can cut back to divert more funds to your HELOC. If you receive bonuses at work, allocate them to your HELOC. Or find an additional source of income with a second job or side gig.
Also, stop drawing from the HELOC. Paying it down won’t do much good if you continue to draw against it.
If you have a HELOC in the repayment period or an equity loan, getting out from under that payment can help protect your budget and your home if you have a decrease in income for any reason.
Just know that while paying more to the principal will decrease how long it takes you to pay off the loan, it will not lower your monthly payment. You won’t get any immediate relief from your prepayment efforts.
A refinance is likely a better option for paying off the loan early for those tied to regular equity loan payments. To see if you’re a refinance qualified, fill out our online application or contact us.
Refinance Your Home Equity Loan
If you have a home equity loan, you may not have as many options for paying off your loan early as with a HELOC. You can refinance your home to have one mortgage payment rather than both.
HELOC borrowers have a few options. First, you can refinance the HELOC into a new HELOC. The old HELOC gets repaid with the new, and the draw period essentially resets. You can sometimes refinance your HELOC into a fixed rate HELOC. You have the same draw period, but the repayment period’s interest rate is fixed.
Another option to pay off your HELOC early is to convert it into a home equity loan through a refinance, which will also fix the rate, although it won’t help get rid of that monthly payment.
Lastly, you can refinance your home and roll the HELOC into a new mortgage.
There is not one refinance option that is best for everyone. Often determining how to pay home equity loans faster is best decided with the help of a lender.
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Talk With a Lender About Your Options
If you’re trying to pay off your HELOC or home equity loan faster and prepayment is not paying down your loan quickly enough, look into available refinance options.
While home equity loans often represent a smaller portion of a home’s equity than a mortgage, the bank can still foreclose for failure to make equity loan payments even if the mortgage is up to date. A refinance could get you into a better financial position.
To see if you qualify for home equity refinance, fill out our online application or connect with one of our financial advisors. Our local service areas are Whitby, Oshawa, Ajax, Bowmanville, Courtice, Pickering, and Newcastle.
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