A home equity line of credit, or HELOC, lets you turn your home into a source of financing. As a second mortgage, a HELOC is secured by your home’s equity, but unlike a primary mortgage, it can be used like a credit card.
HELOCs have an initial draw period that’s usually five to 10 years, where you can use the line of credit and make interest-only monthly payments. After the draw period is over, you enter repayment, which is when you can no longer take out funds and must work to eventually pay off the loan.
However, as you pay back your loan, you may wonder whether you can refinance your HELOC to extend the repayment term or lower your interest rate. Effectively refinancing a HELOC is possible — and there are a few ways to do it.
- There are several reasons to refinance a HELOC, including lowering your interest rate and reducing the monthly cost of repayment.
- Options to refinance your HELOC include opening a new HELOC or consolidating your mortgage and HELOC into one loan.
- To qualify for a HELOC refinance, you’ll need to meet the lender’s financial requirements and be prepared to provide necessary documents.
Why Would I Refinance a HELOC?
When your HELOC enters repayment, you go from making interest-only payments to making amortized payments that cover the interest and principal — like you would with a mortgage payment. This results in a spike in your monthly payment.
For example, if you have to repay $30,000 at a 6% interest rate, the HELOC’s interest payment is just $150 per month. Once the draw period is over, your monthly payment will increase to $333 to cover interest and pay down the principal over 10 years.
Refinancing could help you avoid this spike in your monthly payment. Rolling your balance into a new HELOC, for instance, means you’ll return to making interest-only payments. Another potential option is lengthening the repayment term to lower your monthly payment. However, remember that you’ll wind up paying more in total over the life of the loan, and you’re only postponing the repayment period.
Options To Refinance a HELOC
If you want to refinance a HELOC, there are several options. While these options might not be considered refinancing in the traditional sense, they effectively work like a refinance to adjust your interest rate and terms to make your monthly payment more affordable.
Open a new HELOC
One way to refinance a HELOC is to simply open a new one. When your existing HELOC enters repayment, you can open a new line of credit, if qualified. Then, you can draw funds from the new HELOC and use it to pay off the old one.
This strategy means you avoid the spike in your monthly payment and only need to keep covering accrued interest. It also means you can continue drawing funds from your home equity as needed.
However, this strategy will delay paying off your loan, which means you’ll pay more interest in the long run. HELOCs also have closing costs — including title search fees and origination fees — which can be 2% to 5% of the line of credit. You’ll have to cover those costs again if you want to roll your balance into a new HELOC.
“Typically, lenders will necessitate a home appraisal to assess your home’s current value,” says Jason B. Ball, a certified financial planner based in West Linn, Oregon. “This valuation will determine the amount you can borrow.”
You need to hope that the appraisal comes back high enough for your home to secure the loan. If your home has lost value or your credit score isn’t strong enough, you might not qualify for a new HELOC.
Appraisals for a HELOC also can cost either a flat fee of $300 to $400, or an annual fee of $100 or less.
Take out a home equity loan
A home equity loan, like a HELOC, uses your home equity to secure a loan. While a HELOC is a line of credit you can draw funds from more than once, a home equity loan offers a lump sum upfront that you pay back over time. You could effectively refinance your HELOC into a home equity loan by using the proceeds from the loan to pay off your HELOC.
Home equity loans often have fixed interest rates, which makes this a way to swap your HELOC’s variable rate for a more predictable one. You also can select your repayment term, which affects the size of your monthly payment.
This strategy is subject to many of the same drawbacks as opening a new HELOC. For example, you’ll have to pay closing costs and meet credit and equity requirements.
Consolidate your HELOC and mortgage
A cash-out refinance involves refinancing your primary mortgage to a higher balance than your existing mortgage and taking the difference in cash. For example, if you owe $150,000 on your mortgage, you could refinance to a $200,000 loan and get $50,000 in cash to use as you please — minus fees. To refinance your HELOC this way, you would use the proceeds from your cash-out refinance to pay off your HELOC balance.
An advantage of this strategy is that it leaves you with just one monthly loan payment, rather than two payments for your mortgage and for your HELOC. You also can adjust the interest rate and repayment term of your primary mortgage.
However, if you have a low interest rate on your HELOC, you may not want to replace it. Closing costs for cash-out refinancing also are usually higher than for a new HELOC due to the larger loan amount.
Use a personal loan to pay off your HELOC
If your HELOC balance is relatively small, you can consider applying for a personal loan and using the proceeds to pay off the line of credit.
Personal loans typically are unsecured loans, which means you won’t need to put your home at risk or have built up sufficient equity to qualify for one. You also could get a personal loan with a fixed interest rate, which can make the payment more predictable.
However, because there’s no collateral for missing payments, this means personal loans tend to have much higher interest rates than loans secured by a home. You also need strong credit to qualify.
Alternatives to Refinancing Your HELOC
Refinancing a HELOC isn’t the only way to adjust your interest rate and terms. Here are some alternatives that could help you save money on your HELOC repayment.
Negotiate with your lender
If you’re about to enter repayment but facing financial trouble, speak with your lender to see if it’s open to negotiation. Loan modification can change the rate and terms of your HELOC, and help you reduce your monthly payment without refinancing it.
HUD assistance programs
The Department of Housing and Urban Development offers guidance and programs that can help homeowners who are facing financial trouble and at risk of foreclosure. Another option is to connect with a housing counselor who can help you find educational resources or programs that offer financial assistance to make your mortgage payment more manageable.
Pros and Cons of Refinancing a HELOC
Refinancing a HELOC can help your financial situation, but there are drawbacks to consider.
Advantages of refinancing a HELOC
Some perks of refinancing a HELOC include:
- Lower monthly payment. Refinancing to a longer term or better rate can lower your monthly payment.
- Fixed interest rate. Most HELOCs have adjustable interest rates, which can make your payment unpredictable. Many refinance options let you swap to a fixed rate.
- Delay repayment of the loan principal. When your HELOC enters repayment, you must pay both principal and interest. Rolling the balance into a new HELOC can help you avoid this and return to a smaller, interest-only payment.
- Access to more funds. If you have more equity in your home or stronger credit, you could open a new HELOC with a higher limit or use a cash-out refinance to access more of your equity.
Disadvantages of refinancing a HELOC
Some drawbacks of refinancing a HELOC include:
- Upfront fees. “Refinancing comes with significant closing costs, which may outweigh the benefits if the reduction in interest rate is not substantial,” Ball says.
- Higher interest rate. If market interest rates have risen since you originally opened your HELOC, you may refinance to a higher rate, increasing the overall cost of the loan.
- More costly loan in the long run. Delaying principal repayment means a lower monthly payment at first, but you’ll pay more in interest overall and stay in debt for longer.
How To Qualify For a HELOC Refinance
If you want to refinance a HELOC, you’ll need to qualify for whatever loan you’re intending to use for the refinance. That means meeting financial requirements and providing the right documentation.
Like when you first applied for your HELOC, you’ll need to meet certain requirements to refinance the loan. Common requirements include:
- Credit score. The higher the better, but 620 is usually the minimum to get a new HELOC.
- Debt-to-income ratio. Lower DTI ratios are better, and most lenders set limits at 50% or lower. You can use a DTI ratio calculator to figure out yours.
- Combined loan-to-value ratio. A common rule of thumb is that your combined LTV ratio can’t exceed 80%. In other words, you must have at least 20% equity in your home.
- Home value. Your home must be worth enough to secure the debt. That’s accounted for in the LTV ratio requirement. Generally, it means that your home must have gained or at least held its value since you got the initial loan.
- Income. You must have sufficient income to be able to repay the loan, as shown through your DTI ratio.
Expect your lender to ask for refinancing documentation to show that you’re able to handle the loan. Have these documents ready:
- Two forms of government-issued identification. A driver’s license and another form of ID are common options.
- Employment and income information. The lender will verify that you earn enough to repay the loan. Usually, you can provide a recent pay stub or two to prove this.
- Mortgage information. If you’re refinancing with a different lender, you’ll have to provide recent mortgage statements.
- Property information. You’ll need to provide details about the property securing the loan, such as its address, size, or number of bedrooms.
- Outstanding debts. Have statements for your different credit cards, student loans, and other debts ready to show to the lender.
FAQ: Refinancing a HELOC
Here are answers to some common questions about refinancing a HELOC.
If you can’t repay your HELOC, reach out to your lender as soon as possible.
“Communicating with your lender should be your first step,” Ball says. “They might be able to offer temporary relief, such as a forbearance plan or loan modification.”
If your lender is unable to provide a solution, look into refinancing options. If you’re qualified, refinancing your HELOC can help you adjust its interest rate or repayment period, which could help make your monthly payments more manageable.
If you fail to pay back your HELOC, you may be charged additional interest and penalty fees, and the lender may foreclose on your home.
When a HELOC enters repayment is a popular time to refinance. Refinancing at the end of the HELOC’s draw period lets you take advantage of the full period before switching the loan to one that’s easier or more predictable to repay.
Refinancing your HELOC will adjust its interest rate. Whether the rate is higher or lower will depend on your credit score, the rate of your old HELOC, and current market rates.
The Bottom Line on Refinancing Your HELOC
Refinancing your HELOC can let you extend the draw period on your loan, lower the monthly payment, or swap to a fixed interest rate. However, refinancing isn’t free, and you do need to qualify for a new loan. Take the time to shop around and compare HELOC refinance options to find the best deal.