Can You Refinance a HELOC?

A home equity line of credit or HELOC is a popular way for homeowners to turn equity into cash, but can you refinance a HELOC? You sure can! If  interest rates continue to rise, many homeowners will consider a HELOC refinance.

You have the option to refinance your HELOC into a new line of credit, a fixed-rate home equity loan, a mortgage, or a fixed-rate HELOC. 2024 is a great year to consider a refinance HELOC that enables you to raise the line amount. In may instances, refinancing a HELOC offers additional cash out opportunities to finance home improvements and pay off debt. Let’s dive in to the guidelines and requirements for how to refinance a HELOC to improve your financial situation.

How to Get the Best HELOC Refinance

The HELOC is a revolving home equity credit line secured by real estate and typically has variable interest rates.

You may consider refinancing it if you can get a better HELOC rate, or perhaps you need to renew the draw period.

There are several options to refinance a HELOC loan.

Homeowners have the option to refinance a home equity line of credit or HELOC loan, which can lead to a lower interest rate or reduced monthly payments.

I’ll discuss each so you can find the one best suited to your needs.

• Refinance your HELOC for a Better Interest Rate
• Consider a Interest only HELOC for Low Monthly Payments
• Compare New HELOC Refinance Quotes from Top Lenders
• Pay off Your HELOC with a Fixed Rate Home Equity Loans
• Refinance Home Equity Line for a New Draw Period
• Refinance Your HELOC with Another Bank or Mortgage Lender

If your property value has increased since you took out your HELOC, refinancing may allow you to tap into more of your equity. You can use these additional funds to renovate your house, buy a rental property, or even finance a business start-up.

The RefiGuide can teach you how to calculate home equity so when HELOC rates fall you can shop for the best broker, bank or lender to assist in refinancing your HELOC. We will show you how to leverage you home equity without refinancing your 1st mortgage.

Can You Refinance a HELOC Loan? What Are the Options?

You can refinance a HELOC with another equity line of credit or take out a different loan. (ie home equity loan, cash out-refinance, or unsecured personal loan)

You may be able to refinance it with the same lender or choose another one willing to do so.

If you decide to refinance a home equity line of credit it triggers the restart of the draw period, accompanied by a return to interest-only payments. Many borrowers appreciate the increased cash flow that comes along with the interest only HELOC.

While this can offer relief if you’re facing challenges meeting your monthly obligations, it’s important to note that failure to reduce the principal balance could result in substantially higher interest payments over time. People are always asking me, “Can I refinance a HELOC?” The answer is yes, but let’s consider the options so you maximize the opportunity.

Here are four ways you can refinance your HELOC:

Refinance into a New HELOC

Refinancing a HELOC with another one simply replaces the old with the new, ideally with the best HELOC rates. You may refinance it with the existing lender or a new one. Once you open a new HELOC, you can borrow money to pay off the old HELOC debt. Doing so will restart the draw period and the revolving credit line or draw period will last 10 years in most cases.

So, if you refinance a HELOC with a few years left in the draw period, you essentially renew the term. You can continue to borrow longer while only making small interest payments during this period.

Most mortgage lenders don’t have a maximum loan limit, but they also seem to specify a maximum loan to value. This option will result in higher payments in the long run, especially if you don’t make any payments toward the principal amount.

You may want to refinance if you choose to move from a variable rate HELOC to a fixed rate HELOC. It makes sense to refinance your HELOC with a lender that offers flexible terms.

Many lenders offer HELOC fixed-rate options, which allow you to get a fixed interest rate for all the money you have borrowed through the line of credit.

HELOC Pros:

• Possibly lower HELOC rates (or a fixed interest rate)
• Refinance Home Equity Line  with a Draw period extension (another 10 years)
• Better terms than a  personal loan
• Pay off HELOC  lower  than current mortgage interest rate
• Interest payments only during the extended draw period

HELOC Cons:

• More overall interest
• More overall HELOC debt
• Potentially more closing costs

Refinance into a Home Equity Loan

Another option to refinance a HELOC is to get a new home equity loan. Take a minute and compare the home equity loan vs HELOC.

It works very similar to HELOC in that it’s based on the equity in your home. However, you get a lump sum of cash instead of a line of credit. As HELOC rates continue to rise refinancing your HELOC into a fixed interest rate home equity loan may be a wise move.

Also, it mostly has a fixed interest rate, so you may be able to get a lower rate than your current HELOC rate. Most borrowers gain peace of mind with a fixed monthly payment that comes with the installment home equity loan. In addition, the fixed home equity loan amount can increase and the payment term can be stretched out longer than a HELOC line as well.

If you refinance with a home equity loan, you can use the cash you receive to close the HELOC. Of course, there may be an early payoff penalty. Many people will consolidate credit card debt, personal loans when they pay off HELOC loans and refinance it into a fixed interest rate 2nd mortgage loan. Many financial advisors recommend the home equity loan because it is fully amortized and every monthly principal payments make a dent in paying off your loan debt.

This route can be favorable if you get the best home equity loan rate. However, you’ll end up paying more interest overall.

Pros:

• Fixed interest rate
• Longer repayment period (up to 30 years)
• Possibly lower monthly payments

Cons:

• More interest in the long run
• Sometimes they have a higher interest rate than a HELOC

Cash-Out Refinance

When you start comparing lenders, make a list outlining the benefits of the HELOC vs cash out refinance so you make a prudent choice. With cash-out refinancing, you’ll refinance your primary mortgage and take on a new one. However, this route can also allow you to pay off the HELOC balance, which isn’t as much refinancing as closing. Homeowners should consider the ability to refinance a HELOC and a personal loan at the same time, but make sure you are saving money and not increasing your debt and interest rates. There are many pros and cons of HELOC vs refinance but you need to weigh your goals and specific needs.

Cash Out refinance vs HELOC: the idea is the same as borrowing against equity in your home. But with the former, you start all over and may lose equity in your home.

A cash-out refinance only makes sense if you really need cash or are getting a significant reduction in your mortgage rate. Doing so at a higher interest rate will result in significantly higher interest and monthly payments. The RefiGuide will help you compare the cash out refinance vs HELOC so you can secure lower monthly payments while making an informed decision.

Pros:

• Debt consolidation
• Upfront cash (if left after paying off HELOC or other loans)
• Lower interest rates

Cons:

• Loss of equity
• More debt
• Closing costs

Refinance into a New Mortgage

Another option is to roll your primary mortgage and HELOC into a new loan.

After you pay off HELOC credit lines, the new mortgage will have its own rate and term based on your creditworthiness, payment history, income, and market rates. If the term is shorter, you may get a smaller rate. However, your monthly payments would most likely be higher.

Again, remember that you’d have to bear the lending fees for the old mortgage and any early payoff fee on the HELOC, which is an added financial burden.

Pros:

• Debt consolidation
• Lower, fixed rate
• One monthly payment

Cons:

• Complex paperwork
• Closing costs

Requirements for HELOC Refinancing

When refinancing a HELOC loan, the requirements are typically similar to those you had to meet to qualify for the HELOC in the first place.

However, the exact requirements may vary depending on exactly how you want to refinance home equity lines of credit and what the lender wants to see.

To refinance a HELOC loan or credit line, you must meet certain criteria.

Primarily, most mortgage lenders will require that you have adequate equity in your home.

If you do not have more than 20% equity in your home, then the credit score will be very important.

How to Qualify for Refinancing Your HELOC

Refinancing your HELOC or home equity loan involves a process similar to that of refinancing a primary mortgage. You’ll need to qualify based on factors like your income, expenses, debts, and the value of your home. This process requires you to submit various documents, including pay stubs, W-2 forms, bank statements, and tax returns. Additionally, you will need to pay for a home valuation, which could be a full appraisal, a drive-by appraisal, or an automated appraisal.

Generally speaking, whether you’re refinancing with a new HELOC or another financial product, you’d have to satisfy the following requirements:

• Credit score: Many lenders may set minimum HELOC credit score requirements. With a good credit score (700 and above), you may qualify for a lower rate. Similarly, you may qualify with a low score but expect to pay a higher rate. Underwriters need to consider your existing credit, monthly payments and any adverse actions like late payments or collections being reported on your credit report.
• Debt-to-Income (DTI) ratio: Lenders will also look at your existing monthly debt payments and how much you earn to see whether you can make the potential monthly payments on the new loan situation. Most lenders want a debt to income ratio of 50% or less, while some require 43 percent or less (usually for first mortgages).
• Income: You will also need to show consistency in your income, which you may show with your W2s or 1099s and pay stubs to prove your ability for the proposed monthly payment.
• Existing Mortgage Info: Be prepared to provide your most recent statement for your primary mortgage and HELOC. The statements should show each monthly payment and show when the draw period ends and when the repayment period begins.
• Property Information: Includes the address of the property being refinanced. A property appraisal may be required if you  are going with a new lender or bank.
• Personal Information: Typically includes two forms of government-issued identification.

Information on Outstanding Debts: Lenders will ask for statements of any outstanding loans, such as auto loans, student loans, and other debts.

When to Refinance a HELOC?

Refinancing a loan of any type, including HELOC, should only be considered if the new loan offers better conditions. Borrowers frequently ask, “Can I refinance my HELOC with another bank?” You do not need to keep your home equity line with your current bank. In fact, we suggest shopping for the best company to refinance your HELOC account with.

In the case of HELOC, you can refinance at any time during the loan term. However, it wouldn’t make fiscal sense to do it if you’ve just about paid it off entirely.

On the other hand, some folks may consider doing it near the end of the draw period. This way, they get another 10 years to draw money and pay interest.

As I mentioned earlier, this option is expensive and risky. You’ll pay more interest overall and take on more debt. And if your finances aren’t in order, you risk losing your home if you fail to make payments in the HELOC repayment period, which can be significantly higher. It may be time to pay off your HELOC.

Similar risks exist with options like a home equity loan or a new mortgage.

You can consider refinancing a HELOC if your credit score and income have noticeably improved since the time you got the loan.

Refinancing with better creditworthiness may get you a lower rate (especially if you’re going with a low fixed rate).

It ultimately depends on your financial standing and the deal you’re getting from the lender.

Don’t forget to do your homework and estimate how much more debt you’ll be taking on and how much your monthly payments will be.

A hasty move with comparatively poor loan conditions will put you in more debt and increase your risk.

Alternatives to HELOC Loan Refinance

What if you don’t qualify for a refinance? What if you don’t want to refinance? In such cases, you may request a loan modification with your lender.

Not every lender may accommodate loan modifications, but it doesn’t hurt to inquire.

If you’re struggling to make the monthly payments on your HELOC, a loan modification may allow the HELOC payments to fit your budget and perhaps extend your repayment term.

For instance, some lenders may consider recent financial hardship like a medical emergency or loss of employment.  Keep in mind that such a modification will affect your credit score negatively.

Another alternative is applying for a personal loan. This loan will have its own requirements and conditions and won’t be secured by your home. However, the rates are higher than loans secured by a home.

You can use the personal loan funds to pay off the HELOC balance if approved. Keep in mind that he HELOC interest rates are typically lower than personal loans.

Conclusion

Refinancing a HELOC is a major financial decision that should be made with much consideration.

While there are multiple options, go with the one that makes the most sense, given your financial circumstances.

If you believe you can get better conditions with a new loan, especially if you’ve improved your creditworthiness, refinancing HELOC may be a good idea.

One significant advantage to a HELOC  refinance is the option to opt for interest-only payments throughout the draw period. This allows for borrowing a substantial amount of money over an extended timeframe while only fulfilling minimal payment obligations.

However, as repayment commences, your monthly installment will escalate, necessitating payments towards both the principal loan balance and interest. At this juncture, exploring HELOC refinance options that may prove beneficial.

Frequently Asked Questions About Refinancing HELOCs

We posted the FAQ below that may help you get your HELOC questions answered quickly.

Can I refinance my HELOC with another bank?

Refinancing HELOC lines with another bank is possible, but it typically involves processes similar to those of obtaining a new HELOC. You’ll need to apply for a new loan, which includes a credit check, appraisal, and other underwriting procedures. Request a HELOC with no appraisal. It’s essential to compare HELOC terms, draw period, repayment period, interest rates, closing costs and fees between your current home equity line of credit and potential HELOC refinance options to ensure it’s financially beneficial.

Can you refinance a HELOC into a mortgage?

Another popular option is to refinance a HELOC into a cash out refinance that includes a fixed-rate. When you choose this option, you are essentially refinancing your HELOC with your existing primary mortgage for one new mortgage and additional cash out that comes to you as a lump sum when the loan closes.

To be eligible for a cash-out refinance, the loan amount must be sufficient to cover both the mortgage and HELOC balances. Key factors to evaluate when refinancing a HELOC include:

Mortgage Rates: If current interest rates are lower than your existing mortgage rate, a cash out refinancing might be advantageous. However, if rates have risen, the new mortgage could carry a higher rate, leading to increased monthly payments.

Loan Closing Costs: These can range from 2% to 6% of the new loan amount, potentially diminishing the benefits of refinancing.

Loan to Value: Refinancing a HELOC may reduce home equity, and in the event of a decline in property values, the loan could become underwater. Most lenders are looking for 20 to 25% available equity to refinance a HELOC into a mortgage while receiving additional cash back.

If the interest rates are lower, refinancing a HELOC can help lower your monthly payments or interest rate.

What happens to HELOC if you refinance?

Should you choose a cash-out refinance, your new lender will settle the HELOC balance upon loan closure, leaving you with surplus funds to allocate as desired. This avenue may merit consideration if you find yourself in or approaching the repayment phase of your HELOC account and are maintaining full monthly payments.

Can you refinance a home equity line of credit?

Yes, you can refinance home equity lines. You have several options for doing this, including refinancing into another HELOC, paying it off entirely with a mortgage refinance, or using funds from a fixed-rate home equity loan.

Do you have to pay off HELOC when refinancing?

People ask us all the time, “Can I refinance if I have a HELOC?”  So, if a homeowner has a HELOC account and they want to refinance their existing mortgage what happens to the home equity line of credit? Consumers want to know if they can refinance with a HELOC open or if it needs to paid off and closed. Technically, a borrower can request the 1st mortgage lender subordinate the HELOC, but it is rarely approved to refinance a mortgage with a HELOC you already have. In most cases, the borrower will need to pay -off their HELOC or refinance the amount owed on the HELOC and roll it into the new refinance mortgage.

Can you refinance a HELOC to a fixed rate?

Yes, you are allowed to refinance a HELOC credit line to a fixed rate in certain situations. Potential borrowers ask us all the time, Can you refinance a HELOC with another HELOC or home equity loan? That answer is yes as well.

The latest trend is for borrowers to covert their variable rate HELOC into a fixed-rate HELOC with their existing lender or bank. Some HELOC lenders even advertise a fixed-rate HELOC option, that encourage you to convert your current HELOC into a fixed-rate home equity line.

The other common choice is for a borrower to refinance a HELOC into a fixed rate home equity loan.  Once the draw period is over may borrowers want a fixed interest rate and fixed monthly payment that come with a traditional home equity loan that is amortized with simple interest over a specific number of years.

How can I eliminate my home equity line of credit?

If you’re looking to get out of a HELOC, several options are available. You can refinance the home equity line into a fixed-rate home equity loan, a new HELOC, or choose a cash-out refinance.

Does adding a HELOC affect my ability to refinance my first mortgage?

Upon obtaining a HELOC, you might require consent from your HELOC lender to refinance your primary mortgage loan. HELOC lenders reserve the right to decline your request to refinance the primary mortgage loan. If your HELOC lender declines permission for refinancing, clearing the HELOC balance might become necessary before proceeding with the refinancing process. Read more about what the CFPB thinks about the implications of adding home equity lines.

Can you modify a HELOC loan?

You may be able to get a loan modification for a HELOC loan at the lender’s discretion.

Modification options may include extending the HELOC repayment period, changing the interest rate structure, or adjusting the payment terms.

Contact your lender to discuss your options and whether a modification is feasible based on your specific circumstances.

Can you increase your HELOC limit?

In most cases, you can increase the limit of your HELOC by refinancing it with the same lender.

You’ll have to undergo credit and income checks, and the new limit may be determined based on your debt and equity in your home.

Another option is to get a new HELOC with a different lender with a higher borrowing limit and pay off the first one.

Some mortgage lenders mandate a refinance application for those seeking to augment their home equity line of credit limit. Nevertheless, a select few HELOC lenders may offer the option to adjust your limit without necessitating a complete refinancing process.

This alternative could be preferable if interest rates have risen, and you wish to avoid refinancing to a higher rate or incurring additional HELOC loan costs.

Expanding a home equity line of credit limit usually entails either refinancing the existing HELOC or applying for a new one. Alternatively, certain lenders may provide the option to adjust the current HELOC limit without necessitating a complete loan refinance.

As your draw period approaches its conclusion and you seek methods to maintain a manageable monthly HELOC payment or secure a reduced interest rate, exploring refinancing options becomes viable.

Timing the Market for Lower HELOC Rates

Once the draw period ends and the repayment period starts, may be a good time to refinance your HELOC. First, while interest rates are trending higher, that means your variable rates will rise and so will your monthly payments. However, many predict once the Federal Reserve lower the key rates, that HELOC interest rates will drop later this year. Unlike cash-out refinance loans and home equity loans, HELOCs typically have variable interest rates that adjust with market rates. Therefore, when market rates decrease, your HELOC rate will also decrease.

Takeaway on the HELOC Refinance Process

HELOCs offer more flexibility. You can withdraw money as needed, which is useful if you are uncertain about how much you need to borrow or don’t require the full amount at once. Moreover, you are only charged interest on the outstanding balance, not on the total loan amount from the start. Once the repayment period starts the time to refinance your HELOC may help you improve your personal finance situation.

Refinancing a HELOC involves similar steps to those you took when obtaining your original HELOC. Before shopping for a new HELOC or home equity loan, consult with your current lender about how to refinance your home equity credit line. As a customer in good standing, you might qualify for a better HELOC interest rate and waived application or processing fees.

In most cases, there are competitive mortgage companies that want to earn your business. The RefiGuide will help you shop today’s best lenders so you can refinance your HELOC and get the best terms and rates.

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