Can You Refinance a HELOC? Yes. Here’s How.

If you have a home equity line of credit (HELOC), chances are it has a variable interest rate that will eventually go down or up. That can cause its share of stress, especially if rates jump higher, causing you to pay more.

One strategy to avoid this sticker shock is to refinance your HELOC.

In this article, we’ll explore:

• How a HELOC works
• Why a HELOC refinance may be worth it
• When to refinance a HELOC
• Different refinance strategies
• And more

How HELOCs Work

A home equity line of credit (HELOC) is a form of financing secured by your home. It permits you to borrow against your home’s equity up to a predetermined limit.

It works similarly to a credit card, offering a revolving line of credit that can be borrowed from, repaid, and borrowed again. 

A HELOC has two phases:

• Draw period: This often lasts 5 to 10 years. During this period, you can borrow funds as needed up to your credit limit. You can pay down your balance and/or make interest-only payments on what you borrow (although some HELOCs also require small principal payments during this phase).
• Repayment period: This usually spans 10 to 20 years. Once the repayment period kicks in, you can no longer borrow money; instead, you must start making regular monthly payments that include both principal and interest to repay your loan over the agreed-upon repayment term.

HELOCs often have variable interest rates that adjust with the market, leading to fluctuating monthly payments. However, some lenders offer HELOCs with fixed interest rates.

How to Refinance a HELOC

If you’re interested in refinancing your HELOC, here are a handful of ways to make it happen:

Get a new HELOC to replace your existing one

This involves applying for a new home equity line of credit with possibly better terms and paying off your existing HELOC with it. 

Here, the primary advantage is accessing potentially lower interest rates or more favorable terms, while the downside includes undergoing the application process again and paying closing costs.

Modify or convert your HELOC

You may be able to negotiate with your lender to modify the terms of your existing HELOC, such as locking in a lower interest rate or converting a variable rate to a fixed rate. You get to keep the same lender and possibly pay lower fees than opening a new HELOC. 

However, not all lenders offer HELOC modifications, approval is not guaranteed, and this option may not reduce your costs as much as hoped. 

Pay off your HELOC with a home equity loan

This involves taking out a fixed-rate home equity loan to pay off your variable-rate HELOC, providing predictable payments and possibly a lower interest rate, depending on market conditions.

The disadvantage is that it replaces a flexible line of credit with a fixed loan, eliminating the ability to borrow additional funds against your home’s equity.

Opt for a cash-out refinance of your mortgage and pay off your HELOC

Here, you would refinance your entire mortgage loan and cash out home equity at closing, using some of these funds to pay off your HELOC in full. 

“This is a way to streamline your payments and pay multiple creditors with one large payment. However, it prolongs your debt and could cost you more in total interest payments in the long run,” warns Josh Katz, CPA, founder of Universal Tax Professionals.

Pay off your HELOC with a personal loan or a zero-interest credit card

If your HELOC rate has jumped significantly, consider paying off that line of credit via a personal loan, assuming you qualify for a lower rate than your current HELOC. 

Or, apply for a 0% introductory APR credit card, which allows you to skip interest fees on your credit card debt for a promotional period, typically ranging from 12 to 21 months (the 0% interest rate applies to new purchases, balance transfers, or both). 

Just be aware that these options can have shorter repayment terms and/or higher interest rates after the introductory period ends. It’s also important to note that HELOCs often have higher balances than what personal loans and credit cards offer.

Reasons to Refinance a HELOC

There are several reasons why you may want to consider refinancing your HELOC, including:

• Lowering your interest rate and monthly payment
• Converting your adjustable-rate HELOC to a fixed-rate HELOC
• Extending your repayment terms
• Increasing your withdrawal limits

Let’s explore each of these in further detail.

Lower your interest rate and, thus, your monthly payment

Refinancing your HELOC “may lower your interest rate, reducing your monthly payments and total interest paid,” says Dennis Shirshikov, an adjunct professor of Economics at City University of New York. 

“For example, refinancing a $50,000 HELOC from 6% down to 4% can reduce your $250 monthly payment to $167, saving you $83 per month.”

Convert from an adjustable to a fixed rate

Another refinance motivator is the potential ability to convert to a fixed-rate HELOC. 

Converting it from a variable rate to a fixed rate can provide payment stability and protect against rising interest rates. 

Extend your repayment terms

A refi can accomplish another goal, too: extend your repayment term. If, for instance, you lengthened your term from 15 years to 20, you can stretch the balance out to lower your payments.

Suppose you owe $40,000 on your HELOC with five years left in the repayment period and pay $773 monthly. Refinancing to a new 10-year term at the same interest rate could reduce monthly payments to around $444, providing immediate relief for cash flow management.

Increase your withdrawal limit

Refinancing may also empower you to access additional funds, allowing you to borrow more against your home’s increased equity for other needs if your equity has increased since you first took out the HELOC.

Who should Refinance their HELOC?

Ask Katz, and he’ll tell you that some HELOC borrowers are better refinancing candidates than others.

“Ideal applicants include those with a lot of equity in their home, with better credit than when they first took out their HELOC, or who might be struggling with higher payments if their repayment period has kicked in,” Katz says. “Refinancing can also be a clever decision for those who wish to pool multiple loans together or for folks facing large expenses but who desire better terms.”

To improve your odds of qualifying for a HELOC refi, you’ll need to demonstrate stable employment and sufficient earnings.

When is the Right Time to Refinance your HELOC?

The best times to ponder a HELOC refinance are when interest rates have dropped (ideally by at least 1 to 2 percentage points), your credit score has increased, your financial situation or money goals have changed, or you are reaching the end of your draw period and want to bypass higher payments during the upcoming repayment phase.

“By refinancing before rates move higher, you can secure lower payments and potentially save thousands over the life of the loan,” suggests Katz.

Also, if your credit score has gone up and your debt-to-income ratio has decreased, you may be eligible for better rates and terms.

Benefits and Drawbacks of a HELOC Refinance

Hitting reset on your HELOC via a refi offers several advantages:

• Lower interest rates: You can potentially decrease your monthly payments and total interest paid if rates have dropped.
• Fixed interest rate: Switching from a variable to a fixed rate can provide payment stability and predictability.
• Lengthened draw period: If you refinance into a new HELOC, you may be able to extend the draw phase, providing continued access to funds.

However, it’s important to weigh the disadvantages too:

• Closing costs: Refinancing can involve substantial closing costs and fees. 
• Term reset: Refinancing could extend the loan term, resulting in longer debt repayment.
• Credit impact: Applying for a new HELOC can temporarily lower your credit score.
• Reduced equity: Depending on the option you choose, you could reduce your home equity. For example, a cash-out refinance involves taking out a new, bigger mortgage and receiving the difference in cash. This reduces the equity you have in your home. 

Staying pat with your current HELOC could be smarter under the right circumstances.

“You’ll avoid paying closing costs, retain the original terms and conditions – which could be more favorable than if you try to refinance – and avoid the hassles of applying for a new HELOC and filling out paperwork,” Shirshikov says. 

Requirements to Refinance a HELOC

Lenders generally evaluate the same factors as when you first took out your HELOC. These include:

• Debt-to-Income (DTI) Ratio: Your DTI ratio, which compares your monthly debt payments to your income, is a key indicator of your ability to manage additional debt. Lenders typically prefer a DTI below 43%, though lower is always better. A favorable DTI suggests that you have sufficient income to cover your new loan payments alongside your other financial obligations.
• Home Equity: The amount of equity you have in your home is another crucial factor. The more equity you possess, the less risky you appear to lenders. Generally, you need at least 15-20% equity to qualify for a refinance. This equity acts as a buffer for the lender in case property values decline.
• Credit Score: Your credit score reflects your history of managing debt, and it plays a significant role in the terms you’re offered. A higher score often leads to better interest rates and more favorable loan conditions. Lenders typically look for a minimum score of 680 or higher, though this varies significantly by lender.
• Income Verification: Just as with your initial HELOC, you need to prove you have a stable income. Lenders ask for recent pay stubs, W-2s, or tax returns to verify your earnings and assess your ability to repay the refinanced loan.
• Current HELOC Terms: Lenders also consider the specifics of your existing HELOC, including the balance, interest rate, and payment history. Demonstrating consistent, on-time payments on your current HELOC can work in your favor.

What you need to get the refinance started

To kick off the refinancing process, you need to gather several key documents:

• Proof of Income: This includes recent pay stubs, W-2 forms, or tax returns to show your ability to repay the loan.
• Bank Statements: Provide recent statements to give lenders a full picture of your financial situation.
• Current HELOC Statement: Have a copy of your most recent HELOC statement ready, which details your current loan terms and balance.
• Property Tax Statements: Lenders want to see that your property taxes are current.
• Homeowners Insurance Information: Proof of insurance is necessary to ensure your home is adequately protected.
• Credit Report: Your credit report will be reviewed, so make sure it’s accurate and reflects your current credit status.

Alternatives to Refinancing Your HELOC

If refinancing your HELOC isn’t the right fit for you, there are other strategies to explore to help manage and pay off your HELOC.

Loan Modification

Consider working with your lender to modify your HELOC. Adjustments like lowering the interest rate, extending the repayment term, or temporarily reducing your payments can make your HELOC more manageable and help you pay it off more comfortably.

Reverse Mortgage

If you’re 62 or older and looking to eliminate monthly payments while staying in your home, a reverse mortgage could be a beneficial option. It allows you to convert your home equity into cash without the need for monthly repayments, with the loan being settled when the home is sold or when you no longer live there.

The Bottom Line

Give careful thought to the advantages and disadvantages of refinancing your HELOC before pulling the trigger.

“Don’t refinance into a less-favorable loan just to get your payments down for a couple of months. And avoid over-extending the life of your debt far beyond the original repayment terms of the HELOC, as this will raise your overall interest costs,” adds Katz.

Additionally, ponder the total refi closing costs and any fees charged. 

Reviewing the loan documentation thoroughly and consulting with a trusted professional can help you make a more informed choice.

Thinking about refinancing your HELOC? Connect with Refi.com to review today’s HELOC, home equity loan, and refinance solutions tailored to your needs.

Frequently Asked Questions

Can you refinance a HELOC into a mortgage?

Yes, you can refinance your HELOC into a new mortgage. This process is often done through a cash-out refinance or by combining your HELOC with your existing mortgage into a new loan, which may offer more favorable terms and a lower interest rate.

Can you refinance a HELOC into a fixed-rate?

Yes, it’s possible to refinance your HELOC into a fixed-rate loan. This option can provide stability by locking in a fixed interest rate, offering predictable payments over the life of the loan, which is especially beneficial if you expect interest rates to rise.

Can you pay off a HELOC with another HELOC?

Yes, you can use another HELOC to pay off your existing one. This is typically done if the new HELOC offers better terms, such as a lower interest rate or improved payment flexibility. However, it’s important to carefully consider the costs and benefits before proceeding.

How often can you refinance your HELOC? 

There is no hard rule on how often you can refinance a HELOC. However, it’s essential to consider the costs associated with refinancing, such as closing fees and interest rates, which may diminish the benefits of frequent refinancing. Additionally, some lenders may have specific seasoning requirements, meaning you might need to wait a certain period—often 12 months—after the initial loan or previous refinance before you can refinance again. It’s important to weigh the costs and benefits before making a decision.