How to refinance your HELOC

What is a HELOC refinance?

A HELOC functions much like a credit card, providing you with a revolving line of credit secured by the value of your home.

However, like any financial product, a HELOC comes with its own set of terms and conditions — including an interest rate that may fluctuate over time. That's where refinancing your HELOC can come into play.

Rather than letting your HELOC interest rate dance around based on market conditions, some lenders will let you refinance with a fixed rate for the remaining balance. Maybe interest rates have plummeted since you first opened your HELOC — a refinance translates to paying less interest over the life of the loan.

“Don't think of just reducing the interest rate — think of reducing the amount of total interest paid,” said Michael Lush, CEO of Replace Your Mortgage, a real estate investing and education company. “Over time you pay your home off substantially faster.”

But even if rates are a bit higher, refinancing could still make sense if you want to switch to more favorable loan terms or tap into more of your home's worth.

There are plenty of scenarios where a HELOC refi can be a savvy move. Got plans for renovations or debt consolidation? Refinancing could score you a lower interest rate and better repayment schedule. Kids' college tuition looming? Leveraging your equity could help fill that financial gap. You could even use that renewed line of credit for a dream vacation if you'd like. The equity's yours — a HELOC refinance just restructures how you access and repay it.

» MORE: How soon can you refinance a mortgage?

HELOC refinance vs. loan modification

Before diving into a full refinance, it's worth understanding your options. A HELOC loan modification is a simpler alternative where your current lender adjusts your existing loan terms — perhaps converting your variable rate to a fixed rate — without the hassle of a complete refinance.

This process typically involves less paperwork, lower costs and no need to shop for a new lender. A full home equity line of credit refinance, on the other hand, means taking out an entirely new loan to pay off your existing HELOC, which may offer more flexibility but comes with closing costs and a more involved application process.

Should you refinance your HELOC?

If your current mortgage rate is higher than what lenders are offering today, then refinancing could translate to some serious savings over the loan's lifetime. Maybe you scored a great rate back in the day, but now market conditions have shifted out of your favor.

A HELOC refi is also a prime option if you’re sitting on significant equity gains and want to cash in on that increased property value.

“Interest on a HELOC computes differently than a mortgage. It's not an amortization schedule like a mortgage, so, if used correctly, you can pay a fraction of the interest,” said Lush.

Crunch the numbers and weigh any new monthly savings against fees and long-term costs to determine if a HELOC refinance really works for your situation.

But a refinance isn't always the right play. If your credit has taken some hits since you opened the original HELOC, you likely won't qualify for the best rates out there. Racking up tons of other debt could also disqualify you. And don’t forget about closing costs. Still, HELOCs provide an advantage compared with first mortgages.

“Many HELOCs are substantially lower in closing costs than mortgages,” said Lush.

When refinancing doesn’t make sense

Refinancing isn't always the smart move. If you're planning to sell your home within the next few years, the closing costs may outweigh any interest savings. Calculate your break-even point by dividing the total closing costs by your monthly savings — if you won't stay in the home long enough to recoup those expenses, skip the refi.

Refinancing also doesn't make sense if your credit score has dropped significantly since opening your original HELOC, as you'll likely face higher rates or denial. Similarly, if your home's value has declined and you've lost equity, you may not qualify for the loan amount you need.

Finally, if current interest rates are higher than your existing HELOC rate, refinancing would actually increase your costs. In this case, consider a loan modification with your current lender instead, or simply stick with your existing terms until market conditions improve.

» MORE: Fixed-rate HELOCs: a cross between HELOCs and home equity loans

What are the requirements for refinancing a HELOC?

In order to refinance a HELOC, you’ll need to meet certain criteria. Lenders will look at the following before securing your new line of credit:

• Credit score: Most lenders look for a FICO score of 620 or higher to qualify, with the best rates reserved for scores above 740. A high credit score demonstrates your ability to manage credit responsibly.
• Debt-to-income ratio (DTI): Your total monthly debt payments (including mortgage, loans, credit cards, etc.) should generally make up no more than 43% of your gross monthly income. Lenders want to see you have enough income to comfortably cover the HELOC payment.
• Home equity/combined loan-to-value ratio (CLTV): You'll need sufficient home equity, typically at least 15% to 20% of the property value. Many lenders cap the CLTV ratio around 85%, meaning your mortgage balance plus the new HELOC can't exceed 85% of the home's value.
• Income documentation: Be prepared to provide W-2s, tax returns, pay stubs and other proof of stable employment/income.
• Home appraisal: The lender will likely order an appraisal to assess your home's current market value and ensure you meet equity requirements.
• Home insurance and tax documentation: Have documents showing you keep current on homeowners insurance and property taxes.

» MORE: How much does it cost to refinance?

Pros and cons of refinancing a HELOC

Refinancing a HELOC can help you save money and gain more financial flexibility — but it comes with upfront costs and potential long-term trade-offs.

5 ways to refinance your HELOC

When it comes to revamping your home equity line of credit, you've got a couple of paths to explore. The simplest route is modifying your existing HELOC, but it isn’t always possible or the most cost-effective.

Potential refinancing options include obtaining a new HELOC with a different lender or rolling your loan into your original mortgage that streamlines the balance into one fixed monthly payment.

Here are five ways to refinance and the pros and cons of each.

Request a loan modification from your lender

Before exploring a full refinance, consider asking your current lender for a loan modification. This option lets you adjust your existing HELOC terms — such as converting to a fixed rate or extending your repayment period — without taking out a new loan.

HELOC with a new lender

You don’t have to get your HELOC with your existing lender. Instead, you could shop around for a new lender that offers better terms and lower rates than your current lender.

Home equity loan

A home equity loan also allows you to borrow against the value of your home, but instead of getting a revolving line of credit, you get a lump sum of money upfront.

Cash-out refinance

With a cash-out refinance, you essentially refinance your old mortgage with a new one. Then, you take out cash to repay your HELOC. This creates a new mortgage that combines the balance of both your previous mortgage and HELOC.

Use a personal loan to pay off HELOC

If you qualify for a low interest rate, a fixed-rate personal loan could be an alternative to a variable-rate HELOC and its potential for rate hikes.