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How to Refinance Your HELOC
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A home equity line of credit (HELOC) is a revolving line of credit you secure with the equity in your home. As your HELOC reaches the end of its draw period and the repayment period begins, you could see a substantial increase in your payment as you start to pay on both the interest and the principal.
To reduce this payment, you could refinance your HELOC terms using several refinancing options. Reviewing the pros and cons of each can help you decide your best option for a home equity line of credit refinance.
Can you refinance a HELOC?
As with other mortgage products, you can refinance a HELOC because it serves as a second mortgage on your home. Just as you did when you applied for your original mortgage and your HELOC, you’ll need to qualify and apply for a HELOC refinance.
Lenders will look at many of the same factors that were reviewed when you applied the first time. These include your income, debt, credit history and your home’s equity amount.
How to qualify to refinance your HELOC
When refinancing a HELOC, you must meet your lender’s specific requirements to receive approval. These include:
- Home equity. Your home equity is used as collateral to secure the HELOC, so you’ll need a minimum amount of equity in your home. Your lender may allow you to borrow up to 85% of your equity. The actual HELOC amount depends on the other requirements listed here.
- Debt-to-income (DTI) ratio. Lenders need to confirm you have sufficient income to pay for a HELOC in addition to your other debts. The lower your DTI ratio, the better your chances of approval. For instance, Wells Fargo’s guidelines prefer a DTI of 35% or less, but may work with you if your DTI is between 36% and 49%.
- Loan-to-value (LTV) ratio. LTV ratio looks at how much the loan is compared to the home’s value. Lenders calculate it by adding the requested HELOC amount to the current mortgage balance, then dividing that amount by the home’s market value. Lenders prefer an LTV below 80%, but your lender may allow a higher LTV.
- Credit history. A good credit score and history reflects on your ability to pay your HELOC refinance as agreed. Plus, the better your credit score, the lower your HELOC refinance rates are likely to be. Lenders generally prefer a FICO Score of at least 700.
- The value of your home. Lenders need to know the appraised value of your home when determining how much you can borrow. They likely will require you to obtain a home appraisal to submit with the application.
When preparing your HELOC refinance application, you’ll likely need to submit the following documentation to your lender:
- Your personal information, along with that of any co-applicant
- Employment and income information
- Mortgage details, including your payment amount and remaining balance
- Property information, including details on your home, property taxes and home insurance premiums
- Information on all outstanding debts
Ways to refinance your HELOC
When asking, “Can a HELOC be refinanced?” not only is the answer “Yes,” but there’s also more than one way to do so.
1. Ask your current lender for a loan modification
Because you already have a relationship with your lender, it may be willing to work with you to modify your existing HELOC. Explain why you want a modification, and see if your lender can reduce your rate, extend your repayment period or even reduce your principal balance.
Pro: As an existing customer, your lender may be more willing to work with you than a new lender.
Con: Your lender may still deny your request.
2. Apply for a new HELOC to pay off your existing HELOC balance
Receiving a new HELOC could result in lower payments for a longer term, since you’ll delay the repayment period, but the downside is it’ll be more expensive in the long run due to increased interest payments, fees and closing costs associated with a new HELOC application.
Pro: Reduces your monthly payment back to interest-only payments during the new draw period.
Pro: Lower upfront costs than other refinancing options.
Con: No payments are made on the principal balance until the repayment period starts.
Con: You’ll pay more interest over the term of the loan.
Con: The loan’s variable interest rate could increase, resulting in a higher monthly payment.
3. Apply for a home equity loan to pay off your existing HELOC balance
Similar to a HELOC, a home equity loan uses the equity in your home as collateral against the loan balance. However, you have no draw period, so you’ll start paying on interest and principal right away. In addition, because the loan has a fixed interest rate, you’ll pay the same amount over the term of the loan.
Pro: Payments generally are lower over the term of the loan than with a HELOC.
Pro: You make the same payment every month because of the fixed interest rate.
Pro: You start paying on the principal right away, so your loan balance decreases from the first payment.
Con: When including the interest already paid on your original HELOC, you’ll pay more interest in the long run.
Con: You’ll pay closing costs and fees.
4. Refinance your mortgage
Another option is to refinance your mortgage and HELOC into one new mortgage loan. Not only would you receive a fixed interest rate, but it’s also possible it may be a lower interest rate, which could reduce your monthly payments. Even so, you’ll likely pay more interest over time because you’re now paying interest on the HELOC for a longer term. It might be possible to get a cash-out refi so you can refinance a HELOC into a mortgage, though this only works if you receive enough cash to pay off your existing HELOC.
Pro: Pays off your existing HELOC.
Pro: If it’s a cash-out refi, you may qualify for more money than you need to pay off the HELOC, leaving you with extra cash.
Con: Your HELOC lender may be able to block your refi.
Con: Closing costs and fees could far outweigh the benefits of a single payment with fixed interest.
Con: Refinancing could reduce your equity to less than 20%, meaning you might have to purchase private mortgage insurance (PMI), adding to the overall costs you’ll pay.
Other alternatives to refinancing a HELOC
If the above options don’t work for you, you may consider the following alternatives to refinancing a HELOC:
- Personal loan. If your existing HELOC balance is not too high, you may qualify for a personal loan with a fixed interest rate to pay off your HELOC. Because most personal loans don’t require collateral, you’ll no longer be using your home’s equity to qualify.
- Fixed-rate HELOC. It’s possible to convert your HELOC into a new HELOC with a fixed-rate, which means you’ll have fixed payments that won’t fluctuate over time. This can help you budget for paying off your HELOC on time.
- HUD assistance programs. The U.S. Department of Housing and Urban Development (HUD) has programs that may help you refinance your HELOC. To find out more, you can call the Consumer Financial Protection Bureau at 855-411-2372 and speak with a HUD-approved housing counselor.
When deciding to refinance your HELOC, consider all the costs as well as all the benefits to ensure a HELOC refinance is the right financial choice for you.
For instance, if you choose a home equity loan to pay off your existing HELOC, you could pay lower closing fees than with a traditional mortgage, plus you could have a lower interest rate than your HELOC. However, that interest rate still may be higher than the rate you could get on a traditional mortgage. If you try refinancing a HELOC into a new HELOC, you may experience more stringent qualifying requirements than before.
Note that the tax benefits of a HELOC have also changed. The only way to deduct interest on a HELOC is by using the funds to “buy, build or substantially improve the taxpayer’s home that secures the loan,” according to the IRS. So, if you’re using a new HELOC to pay off an existing HELOC, you won’t be able to deduct the interest you pay on that loan.
As with all loans, it’s important to shop around with several lenders (generally, at least three) and compare the loan terms, interest rates and fees to determine which one is the best for your financial situation.
FAQs about refinancing a HELOC
Can you refinance a HELOC into your primary mortgage?
Yes, you can refinance your HELOC and primary mortgage into one new primary mortgage loan. The drawback, however, is that you may pay more interest over the long term on your HELOC funds, and it’ll take longer to pay it off. In addition, you’ll add to the cost of the loan in the form of closing costs and fees.
When is a good time to refinance a HELOC?
If your HELOC repayment period is about to begin and you can’t afford to pay the new, higher payments, you may consider refinancing your HELOC. Likewise, if interest rates are really low, you may talk to your lender about refinancing at a lower rate. Either of these options may result in lower payments for you.
Can you refinance a HELOC with bad credit?
If you have a substantial amount of equity in your home, you might qualify for refinancing a HELOC with bad credit. Talk with lenders to see what requirements they have in place, and how you can meet those to qualify for refinancing a HELOC.
What are refinance HELOC rates like?
Because they are variable, HELOC refinance rates fluctuate greatly depending on the lender and financial conditions, and they’re usually higher than conventional mortgage rates. For instance, Regions Bank’s rates range from 3.75% to 10.75% APR.