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Refinancing a HELOC
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 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 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.
How do I refinance a HELOC?
If you’re ready to refinance, here’s how to get started:
- 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.
- If you decide to go through with refinancing, research your options with your lender and additional providers to find the best rate and term.
- 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.
- 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.
- 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.
- Lock in your interest rate to prevent rising rates affecting the cost of your new loan. Typically, rate locks last between 30 and 60 days.
- Your loan documents will be drawn up and you’ll have a chance to review expected closing costs.
- Complete the closing process by signing off on your new loan.
- 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 either during the draw or repayment period. Many borrowers refinance their HELOCs right before entering the repayment period. Refinancing during the draw period can help avoid the payment shock of going from interest-only payments to significantly higher monthly payments that include principal and interest. If you anticipate difficulty keeping up with payments after the draw period ends, it may be time to refinance.
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.
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 potentially take advantage of more competitive interest rates.
- 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.
- HELOC. Start a new draw period by rolling your old HELOC into a fresh one. Although this may feel like putting off the inevitable, 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.
What to watch out for
Before you apply, keep the following in mind:
- Closing costs. Conventional loans, home equity loans and HELOCs all come with closing costs that may run approximately 2% to 5% of the loan amount.
- HELOC fees. If you refinance to another HELOC, you may also pay an annual maintenance fee to keep the line of credit open and an inactivity fee if you don’t use it.
- HELOC variable interest rate. Most HELOCs have a variable interest rate, which can significantly raise (or drop) your monthly payment depending on the market.
HELOC refinance eligibility by loan type
You’ll need to meet the following borrower eligibility criteria before refinancing:
|Conventional loan||Home equity loan||HELOC|
|Minimum credit score||620, though 740 or higher is best||620, though 700 and above may qualify for the best rates||680|
|Maximum loan-to-value (LTV) ratio||97%||85%||85%|
|Maximum debt-to-income (DTI) ratio||36% but up to 45% with credit score and reserve requirements||43%||43% to 50%|
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 to tweak your current terms, depending on your financial circumstances.
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