Ways to Refinance a HELOC

Can You Refinance a HELOC?

Yes, you can refinance your HELOC, and as we'll see, there are multiple ways to do it. Refinancing can also help you accomplish certain financial goals, like reducing your interest rate or giving yourself more time to repay what you owe. Just make sure to weigh the pros and cons of each option before moving forward.

Requirements to Refinance a HELOC

Refinancing your HELOC could add a buffer to your budget and help you pay down your debt more effectively, but you must qualify with your lender. Eligibility criteria vary, but most lenders weigh the following considerations:

• Home equity: You'll need sufficient home equity to refinance your home. That's the difference between your home's value and your mortgage balance. Most lenders require a combined loan-to-value (CLTV) ratio between 80% and 85%, which typically means you'll need at least 15% to 20% equity in your home.
• Debt-to-income ratio: When you apply to refinance your HELOC, your lender will typically review your debt-to-income ratio (DTI) to evaluate your ability to repay the loan. Lenders generally look for a DTI of 43% or less, which means no more than 43% of your gross monthly income should go toward monthly debt payments.
• Credit report and score: Aim for a credit score of 680 or higher. Some lenders may approve your loan with a lower credit score, but expect to pay a higher interest rate in that case.

Learn more: Requirements for a Home Equity Loan or HELOC

When to Refinance a HELOC

Refinancing can be useful in many scenarios to achieve certain goals, such as:

• Lowering your interest rate: You may want to refinance if you qualify for a lower interest rate, which could reduce your interest costs and monthly payments.
• Switching to a fixed rate: Most HELOCs come with variable rates that can rise with little advance warning. If you'd rather have predictable payments, you might consider refinancing into a fixed-rate HELOC or home equity loan.
• Extending your repayment term: If you need some wiggle room in your budget, refinancing can add extra years to your repayment term, say from 20 years to 30 years, to lower your monthly payments. Keep in mind that this could significantly increase your total cost.
• Avoiding a payment spike: If your draw period is expiring soon, you may wish to stave off principal and interest payments when the repayment period begins. When you refinance into a new HELOC, you're restarting the draw period with interest-only payments. While this option can help you delay the start of principal repayment, it could increase your total interest charges in the long run.

6 Ways to Refinance a HELOC

If you decide refinancing your HELOC would benefit you, here are six ways to make it happen.

1. Modify Your Current HELOC

Sometimes, the most effective solutions are the simplest ones. If you merely need to lower your monthly payment, consider contacting your lender and requesting an adjustment to your current HELOC. Although it's not technically a refinance, a loan modification, if approved, can make your payments more manageable by extending your repayment term or lowering your interest rate.

2. Open a New HELOC

One way to get more favorable HELOC terms is to take out a new HELOC to pay off the old one. By doing so, you'll reset your draw period while postponing your repayment period. In this case, this strategy's biggest benefit and drawback are the same: A new HELOC will extend your draw period and postpone your repayment period.

This option may make sense if you're certain you can afford the payments when you enter the repayment period—but think twice if you anticipate your income staying the same or decreasing.

3. Pay Off Your HELOC With a Home Equity Loan

This option could help you replace a variable-rate HELOC with a fixed-rate home equity loan. Unlike a HELOC, which allows you to make periodic withdrawals during the draw period as needed, a home equity loan gives you a lump sum upfront. You'll repay in fixed monthly installments over a set term—usually between five and 30 years. Also keep in mind that you'll likely pay closing costs between 2% and 5% of the loan amount.

With a fixed interest rate, your loan payments won't rise if interest rates increase. However, this strategy might not significantly lower your monthly payments and could lead to higher total interest costs if you refinance into a longer repayment term.

Learn more:Home Equity Loan vs. HELOC: What's the Difference?

4. Pay Off Your HELOC With a Cash-Out Refinance

A cash-out refinance is another way you can refinance your HELOC. In this case, you'd take out a new first mortgage for more than what you owe and use the difference to pay off your old mortgage and your HELOC. Ideally, your new loan will come with lower monthly payments and a lower, fixed interest rate.

As with any loan option, it's important to consider the risks. You'll use more of your home equity, which increases the chance of going underwater on your home loan if home values drop. A higher interest rate could also mean a bigger monthly payment. And unless you choose a shorter term, it may take even longer to pay off your mortgage. On top of that, you'll pay closing costs, which usually range from 2% to 6% of the loan.

5. Refinance Your HELOC and Mortgage With a New Mortgage

If you don't want to tap into your home equity again, you might combine your HELOC and current mortgage into a new first mortgage without pulling cash out. This type of refinance could simplify your finances with a single loan and one payment. The new loan will typically come with new terms.

This strategy could make sense if the new home loan comes with a lower interest rate or you want to switch from a variable rate to a fixed one. It could also help you avoid the large payment increase that can happen when a HELOC shifts from the draw term to the repayment term. However, these loans tend to be more complex, and you'll want to weigh the closing costs against how much you'll actually save to determine if refinancing is worth it.

6. Take Out a Personal Loan

With strong credit, you may qualify for a personal loan up to $100,000, which could be enough to pay off your HELOC balance. You might consider this option if you want to get out of a variable-rate HELOC and want to switch to a simple, fixed monthly payment without using your home as collateral.

Keep in mind, your payment would likely increase for a couple of reasons. One, personal loan terms typically range from two to seven years, considerably shorter than most HELOCs. And two, because they don't require collateral, personal loans often have higher rates than HELOCs. According to the most recent Federal Reserve data, the average interest rate on a two-year personal loan is 11.66%. Meanwhile, HELOC interest rates are hovering around 8%.

Tips for Refinancing a HELOC

Follow these tips to help you refinance wisely:

• Understand both sets of terms. Before you refinance, look closely at your current HELOC terms to know your rate, balance, repayment period and fees. Then, compare those with the new loan to make sure you're actually saving money.
• Plan ahead for closing costs. You may want to save up for closing costs when refinancing a HELOC. These costs include fees like appraisals and title services, and typically range from 2% to 6% of your loan amount. You can either pay them upfront or roll them into your new loan. Keep in mind, if you include them in the loan, you'll pay interest on those fees.
• Watch out for prepayment penalties. Because it's a line of credit rather than an installment loan, you can usually pay off a HELOC early without any prepayment fees. But you should still confirm with your lender to avoid any surprises. Also ask whether the loan you're refinancing into has a penalty for early payoff. These fees vary by lender, but typically range from 1% to 5% of the loan amount, which could eat into any savings you're aiming for.
• Consider the risks of borrowing more equity. Refinancing allows you to borrow more against your home, but be careful. If home prices fall, you could end up owing more than your home is worth. That makes it harder to sell or refinance again. As a general rule, it's wise to borrow only what you truly need.
• Shop around before choosing a lender. Lenders set their own rates, terms and fees, so it's smart to compare multiple offers before you commit. These offers could come from your current lender, local credit unions and online lenders. Even a small rate difference of 0.5% to 1% can save you thousands over the life of the loan, especially if your balance is large or your repayment term is long.

Tip: Use a loan comparison platform or work with a mortgage broker to quickly and easily compare multiple refinance offers.

Alternatives to Refinancing a HELOC

If you'd rather not refinance or modify your HELOC, consider the following alternatives:

• Sell your home. If you're planning to move or struggling to make your HELOC payments, selling your home may give you enough cash to pay off your balance, as long as the sale price is high enough to cover both your primary mortgage and your HELOC.
• Explore reverse mortgages. If you're 62 or older and have significant home equity, a reverse mortgage could help eliminate your monthly HELOC payments using your equity. A reverse mortgage gives you access to your home's equity without monthly payments. The loan is repaid when the home is sold, you move out or you pass away. However, this option comes with high upfront costs and risk, and lowers the equity in your home.
• Apply windfalls. A tax refund, work bonus, inheritance or other lump sum could help you pay down or eliminate your HELOC balance without refinancing or taking on new debt.
• Use a 0% intro APR balance transfer credit card. If your HELOC balance is low and you have good credit, you may be able to transfer it to a credit card with a 0% introductory APR. The promotional period lasts up to 21 months, which may give you enough time to pay off the balance interest-free. Just be aware that once the intro period ends, the rate jumps to the card's standard APR, which is usually much higher.

Shore Up Your Credit Before Refinancing a HELOC

You might choose to refinance a HELOC to lower your interest rate, get a fixed rate or adjust your repayment timeline, among other reasons. Review the different ways to refinance or consider the alternatives to help determine the best path for your situation.

Before you apply, take a moment to check your FICO^® Score^☉ for free from Experian to see if it meets a lender's minimum requirement. Sign up for free credit monitoring to help you stay informed and spot any issues that could affect your chances of approval.