By Sabrina Karl
A home equity line of credit, or HELOC, can be a helpful financial tool when used responsibly. But if you’ve had one for several years, it’s worth exploring whether you’d be better served by closing that HELOC and starting fresh with a new one.
One reason is that your amount of home equity has likely changed. When you apply for a HELOC, the lender calculates your loan-to-value ratio (LTV), or the percentage of your home’s value that is financed. The higher your LTV, the higher the interest rate you’ll be offered.
If you’ve been paying your mortgage for a number of years, you may have dropped into a lower LTV tier, offering the potential for a lower rate. Typically, these tiers fall at 90% LTV, 80% LTV, and 70% LTV.
In addition, the current interest rate environment will possibly be in your favor. One of the financial impacts of the Covid-19 pandemic has been a dramatic drop in interest rates, bringing mortgage rates down to all-time lows. As a result, current HELOC rates may be substantially less than the rate on your current HELOC.
Third, many HELOC lenders offer an introductory rate, so you may also be able to secure an exceptionally low rate over the near term.
Of course, there are times when closing your HELOC isn’t just a choice, but is necessary. Anytime you refinance a first mortgage, for example, an existing HELOC on the property must not only be paid off, but must be closed.
If considering closing a HELOC, it’s important to check with your lender on whether there are any penalties for early closure. And as you shop around for a new HELOC, you’ll want to compare the initial costs from various lenders, as well as any annual fees they may charge.