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Refinancing a HELOC

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What to consider before making changes to your equity line.

If your circumstances have changed and you’re ready to refinance your HELOC, you could save time and money with new terms. But beware of potential fees and prepayment penalties that could come with refinancing.

Can I refinance a HELOC?

Refinancing a HELOC into a new mortgage can be an effective money-saving strategy — especially if you’re able to take advantage of a lower rate.

There are several options available when refinancing a HELOC. You can refinance into a conventional loan, apply for a home equity loan or even apply for a new HELOC to pay off your existing HELOC balance.

Before refinancing, speak to your lender about your circumstances. Some offer home equity assistance programs for homeowners in financial distress. Should you decide to refinance, ask your lender about potential fees or prepayment penalties that may apply.

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How do I refinance a HELOC?

If you’re ready to refinance, here’s how to get started:

  1. Before you apply for new financing, sit down with your lender to discuss your options. They may be willing to modify the terms of your HELOC depending on your financial circumstances.
  2. If you decide to go through with refinancing, research your options with your lender and additional providers to find the best rate and term.
  3. Start the application process by filling out a new loan or HELOC application. You’ll need to provide mortgage statements, W-2 forms, tax returns and pay stubs.
  4. Have your home appraised. Your lender will likely order the appraisal for you, as the appraisal helps protect your lender’s interests. The appraiser should be licensed or certified and must act as an impartial third party in the transaction according to federal regulations.
  5. If your application is approved, you’ll be sent an approval letter detailing the terms and conditions of your new loan. Review this carefully and reach out to your lender if anything seems unclear.
  6. Lock in your interest rate to prevent rising rates affecting the cost of your new loan. Typically, rate locks last between 30 to 60 days, giving you and your lender time to prepare and sign off on your final documents.
  7. Your loan documents will be drawn up and you’ll have a chance to review expected closing costs.
  8. Complete the closing process by signing off on your new loan.
  9. Your loan application will be sent to an underwriter to be reviewed. Be prepared to submit any additional information that’s required, such as asset and debt documentation, homeowner’s insurance and title insurance.

How soon can I refinance my HELOC?

You can refinance your HELOC during either the draw or repayment period.

While there are no hard and fast rules about how soon you can refinance your HELOC, your lender will expect you to meet certain criteria to qualify for refinancing — including loan-to-value ratio, debt-to-income ratio, income requirements, and credit score.

When should I refinance my HELOC?

Many borrowers looking to refinance their HELOCs do so as a result of the pinch of entering the repayment period. However, opting to refinance during the draw period may save you time and money.

Keep track of how long your draw period lasts and evaluate whether you’ll be able to handle the larger payments of the repayment period. If you anticipate difficulty keeping up with payments, it may be time to refinance.

What to watch out for

Before you apply, bear the following in mind:

  • If refinancing to a conventional loan, be aware that closing costs typically range between 2% to 5% of the loan amount, and the rate you receive will hinge on your creditworthiness.
  • Home equity loans may have lower closing costs than conventional loans but often have higher interest rates, so you may end up paying more in the long run.
  • If you decide to refinance into another HELOC underwriting standards are likely higher today than they were when you first took out your HELOC. To qualify, you must prove you can afford both principal and interest payments.

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What are my refinancing options with a HELOC?

There are three primary options for refinancing your HELOC:

  • Conventional loan. Refinance into a conventional home loan to take advantage of more competitive interest rates, but watch for high closing costs.
  • Home equity loan. Apply for a home equity loan and pay off the balance of your HELOC in one lump sum. You’ll get the predictability of fixed-rate monthly payments with fewer closing costs than a conventional home loan.
  • HELOC. Start a new draw period by rolling your old HELOC into a fresh one. This may feel like putting off the inevitable, but this option may buy you the time you need to revamp your financial circumstances and prepare for the higher payment amounts of the repayment period.

HELOC refinance eligibility

To be eligible for HELOC refinancing, here are the criteria lenders expect you to meet:

  • Minimum credit score of 600.
  • Debt-to-income ratio of 43% or less.
  • Loan-to-value ratio of 80%.
  • Minimum home equity of 20%.
  • Be able to provide mortgage statements, W-2 forms, tax returns, pay stubs and proof of home insurance.

Bottom line

There are several ways to refinance a HELOC, each with its own unique set of perks and drawbacks. Depending on your financial situation and where you are in the draw or repayment period, refinancing may help reduce your monthly payments or the length of your loan.

If you’re thinking of refinancing, ask your lender for help. Your loan officer may be able tweak your current terms depending on your financial circumstances.

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