Can You Refinance a HELOC?

Article Summary:

You can refinance your HELOC, but you’ll have to have good to excellent credit and a low debt-to-income ratio. To refinance your HELOC, you can use a new home equity loan, line of credit, or mortgage. If these options aren’t available to you, you can also speak to your HELOC lender about a loan modification instead.

A home equity line of credit, or HELOC, is one of the fastest ways to fund a major purchase. It uses your home’s equity as a way to leverage a personal loan. This leads to a drawing period where you can make interest-only payments.

Once that period ends, you will have to figure out a way to pay down the principal balance or sell the home. Like most other personal loans or lines of credit, people tend to wonder whether it’s possible to refinance their HELOC. The good news is that HELOC refinancing is legal and doable in most cases. Let’s review how to do it.

Can you refinance a HELOC?

If you currently have a home equity line of credit, then there is some good news. You can refinance your HELOC. However, you may have to be in decent financial shape or show serious financial hardship in order to refinance it.

Why would someone refinance a HELOC?

Most people who borrow from their home equity tend to stick to paying only interest during the draw period. This can make it feel like you have endless cash to borrow from, but that borrowing can easily add up faster than you think.

When the draw period ends, homeowners often find that their monthly payments are far higher than they can afford. This often leads to a “sticker shock” that makes people realize they’re in over their heads. Once they realize how much they owe during the repayment period, many HELOC loan holders may want to consider refinancing.

Pro Tip

Use your HELOC as a last resort for financing and don’t make the mistake of paying the interest rate alone during the draw period. You may not always be able to refinance it, and then you’ll have to find another way to make your monthly payments.

What should you have before you refinance your HELOC?

Refinancing a HELOC is not that different from refinancing a mortgage loan, or even asking for a mortgage loan modification. You’ll have to jump through similar hoops to get most lenders to work with you and save money at a good rate.

To get a good rate, make sure that you keep this information updated.

  • FICO score. Much like with a mortgage refinance, you’ll need good or excellent credit. Ideally, you’ll have a credit score as close to 750 as possible.
  • Proof of your income. You will need to provide bank statements, pay stubs, and similar proof that you have adequate income to qualify and pay your bills.
  • A low DTI. A debt-to-income ratio is used to calculate interest rates, as well as the likelihood of defaulting on a loan. You should avoid a DTI that’s higher than 50%. If you can’t, then you may need to figure out a way to lower your debts.
  • Home equity. You also will need to have enough home equity to meet the combined loan-to-value ratio. This ratio is calculated by comparing the combined value of all secured loans on the property to the property’s value.

If you cannot show that you’re capable of keeping a low DTI and a high credit score, then you probably won’t be able to refinance.

Different ways to refinance a HELOC

There are several different ways to refinance a HELOC. Let’s take a look at your options.

1. Get a new HELOC

You don’t have to stop having a home equity line of credit if you don’t want to. A lot of people decide to keep their HELOC going by getting a new line of credit. This delays the end of your draw period by giving you a new draw period.

The good side of this is that it delays the moment when you have to pay off your line of credit. The bad side is that you’ll still have to pay the credit off, and this could mean that you default if you’re in really dire straits.

If you’re looking for a new HELOC, consider one of the lenders below.

Pro Tip

If you make the same mistake and pay only interest during the draw period, later on you may end up in the same situation as you’re in now. It’s wise to learn a lesson if the sticker shock hit you hard.

2. Use a home equity loan to pay it off

A home equity loan is similar to a line of credit, with one major exception. With this loan, you get all the money in one lump sum. In the case of refinancing a HELOC, that lump sum is used to pay off the remaining balance on your line of credit. Then, you get to enjoy monthly payments at a fixed interest rate.

This may be a good choice if you want predictability, but it’s not a perfect choice. Interest rates for home equity loans tend to be higher than HELOC rates. This means that your monthly payments may be more expensive.

If you prefer fixed interest rates and consistent monthly payments, take a look at the home equity loan lenders.

Pro Tip

Always run the numbers to find out which refinancing option is right for you.

3. Refinance your HELOC into a new mortgage

If you have a HELOC and a mortgage, that means that you technically have two mortgages. If you roll your HELOC and mortgage into a new mortgage loan, you will then have a single mortgage, a low interest rate, and fewer bills to lose sleep over.

The good news about this is that you will get a lower interest rate than what you would if you used another HELOC. However, there’s a major snag that comes with this low fixed rate. You will have to pay closing costs again, and those can end up being more than what you bargained for.

To get an idea of the loan terms you may be eligible for, review the terms from these mortgage lenders.

Pro Tip

Depending upon how you refinance your mortgage, the new mortgage may end up being more expensive than the old HELOC. Some lenders will be willing to pay your closing costs on a second mortgage, so make sure to ask what they will provide.

4. Ask for a loan modification

It’s important to realize that HELOC refinance options don’t always work out, especially if your financial situation isn’t where it should be. A loan modification isn’t quite a refinance move, but it can help you make ends meet if you’re in dire straits.

This is the only option you have if your credit history took a hit in recent years. Your mortgage lender will ask you to do a trial period of three months to prove that you can handle the monthly payments.

Pro Tip

It’s important to remember that mortgage lenders don’t have to allow you to modify your loan if they don’t want to. Always ask first to find out if this is an option. If it isn’t, check to see if any local HUD assistance programs can help you afford to keep your home.

FAQs

Can I refinance with an existing HELOC?

If you want to refinance a mortgage when you have a HELOC, you might be able to. However, this all depends on your HELOC lender. You’ll need to get your lender’s permission to refinance your home if you have a line of credit based on the home equity you built up.

Can I roll my HELOC into my mortgage?

Yes, and it’s actually a fairly smart HELOC refinance move. However, usually you cannot do this with your first mortgage. To do this, you will need to apply for a second mortgage that covers the payments for your HELOC and your actual home.

Should I convert my HELOC to a fixed rate?

Whether or not it makes sense to convert a HELOC to a fixed interest rate loan depends on your financial situation. It’s best to do the math to figure out what is the best course of action for you.

Can a HELOC be reduced?

Though it’s very rare, there is a possibility that your HELOC can be reduced. As federal law states, it is legal for your line of credit to get reduced in certain circumstances.

The most common reason for this is that your home’s value dropped significantly since you opened your HELOC. However, the law prohibits the bank from decreasing your HELOC to an amount below your current balance if it would raise your required payment.

Key Takeaways

  • You can refinance your HELOC, but it’s not always easy.
  • Refinancing a HELOC requires good credit history, a high credit score, and a reasonable debt-to-income ratio.
  • If you cannot refinance your HELOC due to your financial situation, you may be able to ask for a loan modification.
  • Most people who refinance a HELOC do so because they want a fixed interest rate and lower monthly payments.
  • To prevent this from being an issue, make sure to pay more than just the interest during your draw period.

Learn about home equity and your refinancing alternatives

Let’s face it, home equity loans and similar products are hard to understand. This is true whether you are applying for a home equity loan or an equity line of credit. If you aren’t sure whether you should get a cash-out refinance or a HELOC, SuperMoney can help you out.

SuperMoney has all the tools you need to find a great interest rate, learn about refinance alternatives, and get an understanding of any existing loan you have. You can also expand your knowledge by learning about equity here.

View Article Sources
  1. I just received a letter from my bank advising me that they have frozen or reduced the amount of my home equity line of credit (HELOC). — HelpWithMyBank.gov
  2. Does a HELOC affect my ability to refinance my first mortgage loan? — Consumer Financial Protection Bureau
  3. The Complete Guide to HELOCs: Everything You Need to Know About Home Equity Lines of Credit — SuperMoney
  4. Cash-Out Refinance vs. HELOC: Which is Better? — SuperMoney
  5. How to Tap Into Your Home Equity Without Getting Into Debt — SuperMoney
  6. How To Get Equity Out Of Your Home — SuperMoney
  7. The Best Shared Equity Alternatives to a Home Equity Loan | August 2022 — SuperMoney
  8. The Best Shared Equity Alternatives to a Cash-Out Mortgage Refinance | August 2022 — SuperMoney
  9. Best HELOC Lenders | August 2022 — SuperMoney
  10. 2021 Mortgage Industry Study — SuperMoney