How to Refinance a HELOC: A Step-by-Step Guide

As the payback period on your home equity line of credit (HELOC) begins, the payments may unexpectedly strain your budget and jeopardize your finances. You could refinance your HELOC if you need a lower monthly payment. Read to know about how to refinance a HELOC. 

What is a HELOC? 

Your home will be used as security for a secured loan like a home equity line of credit (HELOC). The lender may acquire your home if you don’t pay your bills on time. But because it is secured, the interest rate on a HELOC is usually lower than on something like a personal loan. Homeowners with equity often get a HELOC to pay for emergencies, big purchases, or even home improvements. 

Why should you consider HELOC refinancing? 

If you only pay the interest on your HELOC for the first ten years instead of paying down some or all of the principal, you may be in for a big surprise when the draw period is over, especially if HELOC rates have gone up since you took out the loan. 

You can refinance your HELOC if you think you won’t be able to handle the payment increase or if you want to pay for some extra projects. Even if the new interest rate is comparatively higher than the one on your original loan, this could be your best bet because it could squeeze in some extra time you need to pay back the money. 

Five ways to refinance a HELOC 

If you think you might not be able to pay your monthly bill during the repayment period, here are some ways to refinance a HELOC. 

• Communicate with your lender 

Some banks have home equity assistance programs and will change your interest rate, loan term, or monthly payments. If you think you’ll miss out on some payments or have had some kind of financial trouble, talk with your lender. If you get along well with your lender, they may be willing to work with you. 

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• Get a new HELOC 

Even though this might temporarily put off the inevitable, starting a new draw period might be best for you. Be aware that the interest rates could increase, and you will pay more in the long run. This may be the best choice if you are young and have a long time to build equity. It’s probably not a good idea if you’re getting close to retirement and won’t be able to make your payments or don’t want to pay more in interest. 

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• Pay your HELOC off using a home equity loan 

This is yet another way to refinance your HELOC but with a catch. A home equity loan differs from a credit line because you get the money all at once. This could be a good option for you with a fixed loan amount, a fixed interest rate, and possibly a longer time to pay back the loan. Keep in mind that if you do this, you’ll be facing high-interest rates. 

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• Refinance your HELOC and mortgage into a new mortgage 

Consider switching to a 15-year or 20-year mortgage if you want to pay less in total interest. Even if the interest rates on primary mortgages are good, you have to think about the closing costs if you go this route. This strategy is usually more complicated and requires a lot of paperwork, which is a bummer. That’s why it’s usually best to get a new mortgage that includes your HELOC only if you can get a lower interest rate. 

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• Get a personal loan 

Not all lenders offer personal loans with high enough loan amounts to pay off a HELOC, but it may still be worth looking into. Personal loans have a fixed interest rate, and most of the time, you don’t have to put up anything as collateral. But they may have a lot of higher fees and interest rates than those of other loans. 

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Alternatives to refinancing 

Even though there are ways to refinance a HELOC, there are some alternatives that can help you with the payments: 

• Fixed-rate HELOC 

Some lenders will let you turn some or all of your HELOC into a fixed-rate HELOC. This could be a good idea if you find a low rate and want your payments to be more stable. 

• HUD assistance programs 

The Department of Housing and Urban Development (HUD) has a number of programs to help homeowners who are having trouble making their mortgage payments. 

How to qualify to refinance your HELOC 

When you want to refinance a HELOC, you must meet the requirements of the lender. Such as: 

• 43% debt-to-income (DTI) ratio 

Lenders have to make sure you make enough money to pay for a HELOC on top of your other bills. Your chances of getting approved go up if your DTI ratio is low.  

• 85% loan-to-value (LTV) ratio 

Your LTV ratio compares your loan amount to your home’s value as a percentage. Lenders figure it out by adding the HELOC amount you want to borrow to the amount you still owe on your mortgage and then dividing that number by the home’s market value. Lenders usually want an LTV of less than 80%, but your lender may let you have a higher LTV. 

• Good credit history 

A good credit score (620 or more) shows you can repay your loans. Also, your HELOC refinance rates will likely be lower the better your credit score. When you apply to refinance your HELOC, you’ll likely need to send your lender the following documents: 

• Your personal information, along with your co-signer. 
• Your income details. 
• Your mortgage details, including how much you pay each month and how much is still owed. 
• The property details include information about your home, property taxes, and home insurance premiums. 
• Details about all the debts that you still owe. 

What to consider when refinancing your HELOC 

As with any loan, it’s important to research, shop around, and compare different lenders to determine which will work best for your finances. And when you do, do consider the following: 

• The loan term and monthly payment. 
• The type of rate of interest (fixed or variable). 
• Fees up front and the total price. 
• Flexibility of the loan conditions. 

Bottom line 

If you refinance your HELOC into a new HELOC, or choose any other way, you may be able to lower your monthly payments. Apply to several lenders and compare their offers to see what choices you have. Check to see which option gives you the best balance of short-term cost and long-term stability. If you can’t refinance, communicate with your lender about changing your loan. 

FAQs 

Can a HELOC be refinanced? 

Yes, it is possible. If you have a HELOC and want to refinance your first mortgage loan, you may have to get permission from your HELOC lender. You might be unable to refinance your first mortgage loan without a HELOC. If the company that gave you the HELOC won’t let you refinance, you might have to pay off the HELOC before you can refinance. 

Is it worth refinancing a HELOC? 

Refinancing a HELOC can be helpful if you want to switch from a variable to a fixed rate. Or if you want to avoid the payment shock of a HELOC that has reached the end of its draw period and will now require larger principal and interest payments. 

What does it mean to refinance a HELOC? 

This means that once the draw period is over, you have to start paying back the principal balance plus interest, so the total amount you have to pay each month goes up. If this extra cost is making it hard for you to make your payments, refinancing your HELOC can help.  

What is the difference between a refinance and HELOC? 

Cash-out refinances make your current mortgage loans last longer, while home equity lines of credit (HELOCs) add a second loan to your current time frame, which means you have to make another monthly payment. 

Monthly payments getting unmangeable? Try refinancing. With Way.com, you get the best refinance options available to you. Use our refinance loan calculator, compare the loan rates, prequalify, and save up to $1850 a year on your refinanced auto loan.