Can You Refinance A HELOC?

A house is many families’ most valuable asset. Not only is it a roof over one’s head, but it’s also a financial tool that you can utilize to access cash in the form of a home equity line of credit (HELOC).

HELOCs have grown increasingly popular in recent years. During the first two quarters of 2022, more than 807,000 HELOCs valued at $131 billion were taken out by property owners, the highest amount since 2007, according to CoreLogic.

However, HELOC rates are typically higher than mortgage rates, and some people face sticker shock when it comes time to repay the principal. Fortunately, there are several HELOC refinancing options available.

FEATURED PARTNER OFFER

New American Funding

Minimum credit score

640

620 with a 65% LTV

HELOC Loan Rates

Lower than the national average

Days to close

Approval may be granted in five minutes but is ultimately subject to verification of income and employment, as well as verification that your property is in at least average condition with a property condition report. Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing.

5 days

Learn More

On New American Funding's Website

640

620 with a 65% LTV

Lower than the national average

Approval may be granted in five minutes but is ultimately subject to verification of income and employment, as well as verification that your property is in at least average condition with a property condition report. Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing.

5 days

What Is a HELOC and How Does It Work?

A HELOC is a line of credit secured by the equity of your home. Think of it as a high limit credit card that allows you to spend what you want, when you want, up to your loan limit.

Unlike a credit card, you typically only need to pay interest charges during the HELOC’s draw period. This is the time when you can take out money from your line of credit; it usually lasts for 10 years. Once the draw period ends, you can’t make any more withdrawals, and you must begin repaying any principal borrowed, often over a period of 20 years.

In addition to being higher than mortgage rates, HELOC interest rates are usually variable. As a result, depending how much you borrowed, monthly payments during the repayment period could balloon to an amount that rivals your regular mortgage payment.

Can You Refinance a HELOC?

If you find yourself facing unaffordable payments, a HELOC refinance is an option. However, not everyone will qualify. Each lender creates its own guidelines, but most consider the following factors:

• Home equity. Many lenders only lend up to 80% of the appraised value of a home. If your existing mortgage exceeds that amount, you may find it difficult to be approved for a HELOC refinance.
• Credit score. If you have good credit and a history of timely payments you’re most likely to qualify. A good score is at least 670 on the FICO scoring model. Those with lower scores may be able to refinance, but they’ll likely pay a higher interest rate.
• Debt-to-income (DTI) ratio. Finally, a lender will likely look to see how much debt you owe compared to your income. Most lenders look for a DTI ratio below 43%.

3 Ways To Refinance a HELOC

Assuming you’re eligible, there are several HELOC refinancing options to consider. You could replace your current loan with another line of credit, pay it off with a home equity loan or roll the balance into your mortgage.

1. Apply for a New HELOC

When you refinance your mortgage, you’re simply replacing your old loan with a new one. The same is true for refinancing a HELOC.

You can apply for a new HELOC either with your current lender or a new lender. Then, you can use the money from the new line of credit to pay off the old loan.

By refinancing to a new HELOC, you restart the draw period and revert to interest-only payments. While this is helpful if you’re struggling to pay your monthly bills, be aware you could end up paying significantly more in interest over the long run if you don’t pay down the principal.

2. Pay Off a HELOC With a Home Equity Loan

Another option would be to pay off your HELOC with a home equity loan. Both loans allow you to tap into your equity, but the loans are structured differently. Rather than having the option to withdraw money over time, a home equity loan gives you a lump sum at closing that you start paying interest on immediately.

A home equity loan may not result in a significant decrease in monthly payments, but it can save you money over time. Many home equity loans have fixed rates and fixed payments. This stability can be attractive if you’re working to get out of debt sooner rather than later.

3. Roll a HELOC Into a Mortgage

To streamline your bills, you could refinance your HELOC and mortgage together into a single loan. However, this option may not be appealing to those who have a low mortgage rate.

“The problem becomes: Do I have to give that rate up?” says Kristina Morales, a mortgage loan officer and chief financial contributor to real estate lending website Loanfully.com. If you purchased your home when rates were at historic lows, you may be hesitant to refinance at a higher rate. But blending the two loans might make sense financially if you have a large HELOC, according to Morales.

In that case, you might pay a higher rate for your mortgage after a refinance, but you could also get a substantial break on the interest for the HELOC. Depending on your credit, HELOC rates can be as high as 10%, Morales notes, but 30-year fixed mortgage rates have averaged less than 7% so far in 2023.

Alternatives to Refinancing a HELOC

These HELOC refinancing options aren’t available to everyone. If you don’t have enough equity or your credit score is too low, banks might not be willing to refinance your mortgage or HELOC. In that case, you could try the following options to reduce your payments:

• Loan modification. Not every lender will modify a loan, and there’s no requirement for them to do so. Still, many banks would prefer to change the terms of a loan by lowering interest or extending the repayment period than to have to foreclose on your property. Modifications may only be available if you’ve had a loan open for a minimum amount of time and made some payments.
• Personal loan. You could also take out a personal loan from a bank, credit union or online lender to pay off your HELOC. Like a home equity loan, a personal loan provides a lump sum plus the stability of fixed payments and a fixed interest rate. On the downside, annual percentage rates (APRs) for personal loans can be higher than HELOCs, and if you have a large line of credit, a personal loan may not cover the entire balance.
• Find more affordable housing. No one wants to move from their home, but selling your property can serve as a last resort if payments become unaffordable. Don’t forget that your HELOC is secured by your house, meaning the lender can foreclose on your property if you stop making payments.

A HELOC can unlock a significant amount of cash for homeowners, but that money needs to be repaid sometime. If you’re having trouble making payments, one of these HELOC refinancing options or alternatives may help. If you aren’t sure which is right for you, consult with a finance professional for personalized guidance.

Related: When To Use A Cash-Out Refinance