How to refinance your HELOC
Options to make your payments more affordable
Sitting on a pile of home equity but feeling the pinch from an adjustable-rate home equity line of credit (HELOC)? If so, it might be time for a little home loan remix. You can refinance that HELOC into a shiny new mortgage tailored to your current needs.
By refinancing, you may be able to lock in a lower interest rate, which can save you a significant amount of money over the life of the loan. Additionally, refinancing could allow you to switch to a lender offering better terms or tap into more of your home's equity if its value has increased.
Refinancing a HELOC can allow you to lock in a fixed interest rate, access more home equity if your home's value has increased or switch to better terms with a new lender.
Jump to insightWhether refinancing makes sense depends on your current interest rate, credit score, home equity amount and how long you plan to stay in the home.
Jump to insightOptions for refinancing include getting a new HELOC (potentially with a different lender), taking out a home equity loan, doing a cash-out refinance or using a personal loan to pay off the HELOC balance.
Jump to insightWhat 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.
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.
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.
Crunch the numbers and weigh any new monthly savings against fees to determine if a HELOC refinance really works for your situation.
» 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.
4 ways to refinance your HELOC
When it comes to revamping that home equity line of credit, you've got a couple of paths to explore. You could simply obtain a new HELOC with a different lender, or roll your loan into your original mortgage that streamlines the balance into one, fixed monthly payment.
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.
Pros
- You can shop around for the best possible rate and terms.
- Switching lenders allows you to negotiate a higher credit limit.
- Sometimes a new lender is simply a better fit.
Cons
- You’ll have to redo the paperwork and hard credit checks all over again.
- You’ll need to repay closing costs — the fees for appraisals, titles and processing can add up quickly.
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.
Pros
- Home equity loans typically offer fixed rates for the life of the loan.
- Like other home loans, maximum limit is 80% of the loan to the home’s value (minus any existing mortgage balance)
- Payments are predictable until it’s paid off.
Cons
- Closing costs can make it an expensive switch upfront.
- You lose the flexibility of a credit line.
- Equity loans tend to have shorter repayment periods, so your monthly payment could be higher.
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.
Pros
- You get to access cash from your home's increased value.
- Rolling your HELOC into a fixed-rate mortgage provides interest rate stability.
- Consolidating your mortgage and HELOC into one new loan means streamlining your payments into a single, convenient bill.
Cons
- You're resetting the mortgage amortization clock by opening a brand-new loan.
- Increasing your overall debt load could hurt your DTI ratio.
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.
Pros
- Personal loans typically have shorter repayment timelines than mortgages or HELOCs.
- There’s no need to put your home up as collateral like you would for a mortgage refinance.
Cons
- You need a very high credit score to qualify for the best terms.
- Personal loans tend to have higher interest rates than home loans.
- You'll likely face strict repayment terms with personal loans.
FAQ
How long does it take to refinance a HELOC?
While a HELOC refinance typically moves a bit faster than refinancing a full mortgage, you should still budget around 30 to 45 days for the whole process.
Will refinancing my HELOC hurt my credit score?
Refinancing a HELOC can lead to a small, temporary dip in your credit score due to the hard inquiry the lender will do. However, as long as you continue making on-time payments, that new loan will soon have a neutral or even positive impact on your credit rating.
What are the typical costs associated with refinancing?
When refinancing a HELOC, you’ll pay closing costs like loan origination fees, appraisal charges and title insurance — around 2% to 5% of the total loan amount. The lender must provide those costs upfront so you can weigh if the long-term savings outweigh those expenses.
Can I refinance my HELOC if I have bad credit?
Most lenders want to see a credit score above 620 before considering you for a home equity loan or HELOC. If your score is on the low end, see if you can find ways to increase it by paying down other debts.
Bottom line
A HELOC can be refinanced to potentially secure a lower, fixed interest rate or better terms. Options include getting a new HELOC, a home equity loan, a cash-out refinance mortgage or a personal loan. But you’ll need sufficient home equity, a decent credit score and a manageable DTI ratio.
Carefully evaluate the fees and long-term costs when deciding if a HELOC refinance makes sense for you.
Article sources
- Consumer Financial Protection Bureau, “Conventional loans.” Accessed June 5, 2023.
- Encyclopaedia Britannica, “home equity line of credit.” Accessed May 10, 2024.
- National Association of Realtors, “Understanding the Power of Second Mortgages in Property Value.” Accessed May 10, 2024.
- Consumer Financial Protection Bureau, “Home Equity Lines of Credit (HELOC).” Accessed May 10, 2024.
- First Federal Bank of Kansas City, “How to refinance a HELOC.” Accessed May 10, 2024.
