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Yes, you can refinance a HELOC — here's how
When a home equity line of credit (HELOC) draw period ends and the repayment period begins, many borrowers experience sticker shock. HELOCs often require minimal principal payments or even interest-only payments during the draw period, so the larger monthly payments required during the repayment period can put a major dent in a household budget.
Borrowers struggling with HELOC payments can improve the situation through refinancing. Though less common or straightforward than refinancing your initial mortgage or a home equity loan, HELOC refinancing can give homeowners some financial breathing room.
In this article:
How HELOC repayments work
A HELOC offers homeowners a revolving line of credit, which you access by tapping the equity in your house and using your home as collateral. HELOCs are similar to credit cards in that the owner can borrow up to the credit limit, repay it, and borrow again during the draw period, which typically lasts 10 years. Most HELOCs have a 20-year repayment period and typically have variable interest rates.
Borrowers who pay only the minimums during the draw period can see payments increase dramatically once the HELOC enters its repayment period.
But getting hit with higher payments after the end of the draw period isn’t just a potential budgeting problem for borrowers. Since HELOCs are secured by the borrower’s home, defaulting on this line of credit could mean foreclosure and the loss of the home.
Learn more: How do fixed-rate HELOCs work?
4 options for a HELOC refinance
Yes, a HELOC refinance is possible. There are several options for refinancing your HELOC, including the following:
1. Request loan modification
If you are struggling with payments, need to access a higher credit limit, want to lower your interest rate, or wish to extend your draw or repayment period, you can ask your lender to modify your HELOC. This option is not a true refinance, but a loan modification. There’s no guarantee your lender will agree to your loan modification request, but it doesn’t hurt to ask before trying other refinancing options.
2. Pursue a cash-out refinance
If you are interested in also refinancing your original mortgage, a cash-out refinance allows you to kill two birds with one stone. With this refinancing loan, you will cash out enough of your equity to pay off the outstanding HELOC balance. From there, you will only have your monthly mortgage payment on your first home loan.
If you can qualify for a more favorable interest rate with the refinancing loan, this could potentially save you money on both your mortgage and the HELOC. But remember that you pay closing costs when you refinance.
Read more: Best cash-out refinance lenders
3. Take out a new HELOC
A tried-and-true way of refinancing your original HELOC is to open a new one and use the funds to pay it off. By taking on a new HELOC, you reset your draw period and postpone your repayment period — and the new line of credit may allow you to increase your credit limit or lower your interest rate. You’ll also have more time to save money or prepare your budget for when the next repayment period comes along. But your new HELOC, like the original one, will generally come with closing costs.
Learn more: How to get a HELOC in 6 simple steps
4. Pay the HELOC off with a home equity loan
Like a HELOC, a home equity loan allows you to borrow against your home's equity. The difference is that home equity loan proceeds are disbursed in a single lump sum, which you begin repaying immediately. Home equity loans are more likely to offer fixed-interest-rate options, and borrowers who have improved their credit or increased their income may be able to lower their monthly payments by refinancing their HELOC with a home equity loan.
Just remember that you will have to pay closing costs of 2% to 5% on a home equity loan, just as you would with a HELOC.
Dig deeper: HELOC vs. home equity loan — Which should you choose?
Should you refinance your HELOC?
Refinancing a HELOC is not the right choice for every borrower. It’s essential to understand the potential pros and cons of this kind of refinancing.
Pros
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Lower interest rates: If your income or credit score has improved or interest rates have gone down since you took the original HELOC, refinancing could help you lower your interest rate and reduce the total cost of the line of credit.
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Lower monthly payments: Refinancing your HELOC can help you reduce your monthly payments. It typically increases your repayment period, meaning you have more time to pay back the same amount.
Cons
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Closing costs: In nearly all cases (with the exception of loan modification), refinancing your HELOC will involve closing costs. While you may be able to roll those costs into your HELOC balance, they are still additional costs you should consider.
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Decreased equity: Depending on which refinancing option you choose, you may lower the equity in your home. In particular, a cash-out refinance will require you to take out a mortgage for more than you owe so you can take the difference in cash. This will reduce your equity, which takes time to rebuild.
Read more: 7 ways to build equity in your home
HELOC refinance FAQs
How do you qualify for a HELOC refinance?
To be approved for any HELOC refinancing options, you will typically need at least 15% to 20% equity in your home, a debt-to-income ratio (DTI) of 43% or lower, and a credit score of 680 or higher. In addition, you will need to provide proof of homeowners insurance.
What are some alternatives to refinancing a HELOC?
Refinancing is not your only option if you’re struggling to repay your HELOC. Homeowners may also consider taking out an unsecured personal loan. Using a personal loan to pay off your HELOC eliminates the risk of foreclosure, but you will also likely pay a higher interest rate. Another alternative for struggling borrowers is reaching out to the U.S. Department of Housing and Urban Development (HUD) for assistance. HUD offers housing counselors who can help borrowers avoid foreclosure.
When is the best time to refinance a HELOC?
The best time to refinance a HELOC depends on your circumstances, but generally, it makes sense to refinance when you are nearing the end of the draw period before facing higher repayments.
This article was edited by Laura Grace Tarpley.
