Can I Improve My HELOC Loan Rates?

Question: I have a HELOC credit of $150,000 of which I have borrowed $100,000 at 5%, which leaves me $50,000 available to borrow. The interest rates dropped down to 3% since then. I was wondering could I use the $50,000 to pay off part of the original $100,000, which would leave $50,000 at 5% and $50,000 at 3%. That would still leave us $50,000 to pay the remaining $50,000 that is at 5%. That would give us two loans of $50,000 at 3%. Is this possible. I hope this makes sense.
– Mark in TN

Denny Ceizyk from LendingTree responds…

Hi Mark. Kudos to you for keeping track of the recent drop in interest rates to keep your payment as low as possible. You could certainly accomplish your rate reduction goals with the plan you’ve laid out, but there are some other options worth considering. Mortgage refinance applications in some areas are skyrocketing, so apply sooner than later to lock in your savings.

There are three ways you could approach this scenario.

Pay off the entire balance and replace it with a new 3% HELOC for $150,000

You might incur a closeout fee on the HELOC, but if the fee isn’t too steep, the 2% interest savings may make it worth it.

• Pros: A new HELOC lowers your rate but still keeps your credit line at $150,000 with only one payment to keep track of. You’ll also start the clock over on your interest-only period, giving you the option to make lower payments if needed to manage your cash flow.
• Cons: There might be a closeout fee when you pay off and close out your new HELOC, and the rate is typically variable, which could result in a higher payment in the future.

Pay off the entire balance with a new first mortgage at a shorter fixed rate term

A 10- or 15-year fixed-rate loan cash-out refinance at current rates may get you close to your 3% target rate for the $100,000 payoff, and you’ll have a loan-free house when you make your last payment.

• Pros: A new first mortgage gives you a guaranteed fixed rate for the life of the loan and gives you a fixed principal and interest payment.
• Cons: The monthly payment for a fixed-rate mortgage will be higher if you were making interest-only payments on your HELOC. The total closing costs are also typically a bit higher for a cash-out refinance versus a HELOC, running between 2% and 6% depending on your loan amount.

Take out a first mortgage and a HELOC

If you still want $150,000 worth of borrowing power, you could also take out a first mortgage for $100,000 at 3% and then add a $50,000 line of credit at 3%. This will give you access to the extra credit if you need it down the road.

• Pros: With this option, you still keep the extra $50,000 worth of future credit open to use, but the $100,000 is paid and replaced with a fixed-rate mortgage at a very low rate.
• Cons: There might be extra closing costs since you’re taking out two loans. You’ll also likely need a new appraisal to confirm you have enough equity to take out the new loans.

The Bottom Line

If you’re using the HELOC for the flexibility to charge up the balance and then pay it off, then you’re probably better off choosing the first option.

If you’d like to pay off the balance with a fixed rate and you don’t need access to the equity, then the second option may be your best choice. Like we mentioned before, refinance applications in some areas are skyrocketing, so apply sooner rather than later if you go down this road.

If you want to clear out the larger balance faster, but still want to have access to the HELOC for future financial plans like home renovations, option three will give you that flexibility.

Best of luck with your refinancing plans.