3 ways, and 1 reason, to refinance home-equity loan

If your home-equity line of credit is approaching its 10th birthday and you owe money on it, youmight soon see a spike in the minimum monthly payments. There are ways to delay the paymentincrease by refinancing the loan.

A home-equity line of credit, or HELOC, has two stages. First is the draw period, which usually lasts10 years but can be as long as 20 years. Monthly payments are applied only to the interest duringthe draw period.

After the draw period ends, the second stage begins: The HELOC goes into the amortization periodwhen you have to pay principal, as well as interest. Monthly payments go up. If you still owe a lot,the payments rise abruptly. That's why some homeowners look for ways to refinance their HELOCs.

"Many people were unaware of how drastically their payment is going to go up," says Peter Grabel, asenior loan officer with Luxury Mortgage in Stamford, Conn. "They've been making a nice, lowpayment of interest only for 10 years at a very low rate."

In pointing out a version of the above scenarios, Grabel notes that they don't take into account thelikelihood of higher interest rates in coming years.

Banks encourage customers to deal proactively with this issue. According to Cynthia Balser, groupmanager of consumer credit products at KeyBank, "Somewhere between six to 12 months before theend of the draw period, banks are beginning to reach out, reminding clients that a decision theymade 10 or 15 years ago is about to come due and asking the client to reach out if they have anyconcerns or questions."

If you want to cushion the amortization period of a HELOC, there are three options:

o Refinance the HELOC. When you refinance a home-equity line of credit, you start over with a newHELOC, with its own interest-only draw period.

With this approach, you still have access to a credit line to deal with future needs. You will still haveto pay off the balance someday. Rick Huard, senior vice president of consumer lending productmanagement at TD Bank, notes: "99 percent of HELOCs are variable rate, and nobody knows whatrates will do a year from now."

o Pay off the HELOC with a home-equity loan. A home-equity loan is for a fixed amount with a fixedrate. The payments remain the same through the life of the loan.

o Refinance the HELOC and the first mortgage into a new primary mortgage. By refinancing theHELOC into a new primary mortgage, you could take advantage of a fixed interest rate that's stilllow by historical standards. Consider refinancing into a 15- or 20-year mortgage to reduce totalinterest payments.

While interest rates on primary mortgages are favorable, you have to take higher closing costs intoaccount when you take this approach. It's best if you keep the house long enough for the cumulativemonthly savings to outweigh the costs of refinancing.

Home-equity loans have much lower closing costs than primary mortgages. The disadvantage is thatinterest rates on equity loans are typically higher than on primary mortgages.

If you refinance into another HELOC, be aware of the heightened underwriting standards. Ten yearsago, you could qualify on the basis of the interest-only payments. Today, you have to prove that youcan afford the fully amortizing payments.

And if this is your first mortgage application since 2008, you might be surprised at how muchdocumentation you will have to provide.

Even though home values have been recovering, what if you still owe more than your home is worth?

"If the value is not there now, it's going to be difficult to qualify for a new loan," Huard says. "That'sone of the situations where you definitely need to contact your bank, talk to your loan officer and seewhat options you have available. They can take a look at your financial picture and be able to workthings out with you."

For instance, the bank could come out with a planthat would help you repay the loan by extendingthe term of the loan.

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