Goodbye HELOC, Hello Mortgage Refinance

A home equity line of credit (HELOC) is often regarded as the best place to turn for home improvement loans. This was especially true a few years ago, when HELOC rates fell to historic lows. But within the past two years, interest rates have soared, pushing up HELOC rates and sending many borrowers into a panic.

As homeowners now attempt to consolidate their debts and tighten their financial belts, some are perplexed about where to turn for home equity loan alternatives. Because HELOC mortgage rates are adjustable, they continue to rise as prevailing interest rates climb, and many consumers have watched their monthly payments soar. HELOC loans have become a source of ever increasing, nagging debt.

Welcome relief: refinance HELOC

What's a debtor to do? For many, refinancing an existing loan to pay off the stressful HELOC mortgage may be the key to financial stability and peace of mind. By taking advantage of so-called "cash-out refinance" options, it's possible to borrow more but end up owing less.

The cash-out mortgage refinance allows you to borrow more than you need to pay off the old mortgage. As a result, you walk away with a lump sum of extra money in your pocket. For example, if you owe $150,000 on your existing mortgage, you may be able to refinance by borrowing $175,000. That leaves you with $25,000 extra to pay off your high-interest HELOC loans.

You'll probably pay a higher interest rate on a cash-out than you would with a normal mortgage refinance; but, in exchange, you can get a rate that's substantially lower than your HELOC, enabling you to save money.

More than 85 percent of refinanced home loans in 2006 were for amounts that were at least five percent higher than the original loans. Homeowners are borrowing more when they refinance, and many are switching to new mortgage rates that are slightly higher than their old ones. But by using a fixed-rate cash-out strategy to pay off expensive HELOC loans, they wind up gaining significant savings. And who wouldn't want to say hello to that?