“How to Refinance a HELOC: A Comprehensive Guide”

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Can You Refinance a HELOC?

Yes, you can refinance your HELOC, and there are multiple ways to do it. For example, you may refinance your current HELOC or pay it off using another loan product, such as a home equity loan or personal loan. Refinancing your HELOC may help you lower your interest rate and monthly payments to make your repayment period more affordable.

Refinancing your HELOC can also help you accomplish other financial goals. For example, using a home equity loan to pay off your HELOC can free up cash to pay off high-interest debts. Before proceeding, you’ll want to consider the benefits and downsides of each refinancing option.

4 Ways to Refinance a HELOC

Refinancing your HELOC may consolidate your debt, lower your interest rate or offer more favorable repayment terms. Here are several methods to consider for refinancing your HELOC:

1. Modify Your 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.

A loan modification, if approved, can make your payments more manageable by extending your repayment term, lowering your interest rate or possibly reducing your principal balance. While acceptance isn’t guaranteed, many banks are willing to work with borrowers facing payment challenges, so it doesn’t hurt to ask.

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.

On the one hand, a new HELOC may be a worthwhile option if you’re certain you can afford the payments when you enter the repayment period. But think twice about this risky option if you anticipate your income staying the same. For instance, if you plan to retire and live on a fixed income soon, that may not be the best time to enter into the repayment period.

Keep in mind, paying off your HELOC with a new one might result in paying more interest over time, and a new HELOC could tempt you to accumulate more debt.

3. Get a Home Equity Loan to Pay Off Your HELOC

Like a HELOC, a home equity loan uses the equity in your home as collateral but works differently. Instead of making periodic withdrawals as needed, like with a HELOC, a home equity loan provides you a lump sum upfront. You must repay the home equity loan over a fixed term, typically five to 30 years. The loan usually has a fixed interest rate with predictable monthly payments, so you can budget to make consistent payments and pay off your loan, and you won’t risk payment amounts rising if interest rates increase.

However, this strategy might not considerably reduce your monthly payments and could increase your total interest charges over the life of the loan. Remember, you’ll also pay closing costs from 2% to 5% of the loan amount.

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

Another option to refinance your HELOC is to utilize a cash-out refinance. In this scenario, you could replace your original mortgage with a new one for a larger loan amount by using some of the equity you have in your home. You can then use the extra cash to pay off your current mortgage and your HELOC. Ideally, your new loan will come with lower monthly payments and a lower, fixed interest rate.

However, this strategy is not without its risks. For starters, you’ll lose more of your equity and risk ending up underwater on your home loan if housing prices drop. If interest rates have increased since you took out your current mortgage, you could lose money and pay more each month with a new, higher-rate mortgage. Additionally, unless you refinance to a shorter-term loan, you’re extending your timeframe for paying off your mortgage. Finally, you’ll have to pay closing costs, typically ranging from 2% to 6% of your new loan amount.

How to Qualify for Refinancing a HELOC

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

Home Equity

You must have sufficient home equity—the difference between your home’s value and your mortgage balance—to refinance your HELOC using the options above. Most lenders cap the amount you can borrow at 80% of your combined loan-to-value ratio (CLTV). This ratio represents the total amount of all the loans against your home, divided by its value. That means if your home is worth $400,000, you might be able to borrow up to $320,000 ($320,000 / $400,000 = 0.80 or 80%).

Debt-to-Income Ratio

Lenders typically gauge your ability to repay a HELOC or other loan options by reviewing your debt-to-income ratio (DTI). This ratio measures all your monthly debt obligations against your gross monthly income. Generally, lenders prefer your DTI to be 43% or less, but the lower, the better.

Credit Report and Score

Regardless of the refinancing option you choose, your lender will likely run your credit to see how well you manage your credit. Minimum credit score requirements can vary depending on the lender, loan product and other factors, but as a general rule, 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.

Alternatives to Refinancing

Refinancing isn’t the only solution for managing a HELOC. Consider the following alternatives to address your HELOC debt.

Convert Your Variable-Rate HELOC

If your HELOC has a variable rate, consider asking your lender to convert a portion or all of your balance to a fixed-rate HELOC. Doing so could lock in your interest rate, making it easier to repay your debt.

Pay Off Your HELOC With a Personal Loan

If you’d rather not use your home as collateral with a new home equity loan, HELOC or refinance, a personal loan might be your best bet. Most personal loans are unsecured, so you won’t have to touch your home’s equity to qualify. Consequently, personal loan interest rates are often higher than HELOCs because lenders tend to view them as riskier. Remember, you may incur an origination fee from 1% to 6% of the loan amount.

Consider a HUD Assistance Program

The U.S. Department of Housing and Urban Development (HUD) offers several programs to assist homeowners at risk of foreclosure or who face challenges paying their mortgage payments. Contact a HUD-partnered housing counseling agency to explore your options.

FAQs

How Many Times Can You Refinance a HELOC?

There is no set limit to the number of times you can refinance a HELOC, but each time you do, you may incur additional costs and extend your repayment period.

How Does HELOC Repayment Work?

HELOC repayment typically begins after the draw period ends. During the repayment period, you must pay both the principal and interest, which can result in higher monthly payments.

How Long After a Mortgage Can You Get a HELOC?

You can generally apply for a HELOC as soon as you have sufficient equity in your home, but some lenders may have specific waiting periods.

The Bottom Line

If you’re struggling to make your HELOC payments, it’s wise to be proactive and take action as necessary to avoid foreclosing on your loan. Contact your lender and explain your situation, especially if you can’t repay your HELOC due to a temporary financial hardship. Many lenders offer hardship programs or may pause your payments temporarily until you can get back on your feet.

While you’re shaping up your finances, it’s also a good idea to ensure your credit health is strong. Consider getting free credit monitoring from Experian to understand what factors are impacting your credit and to receive real-time alerts about changes to your credit score.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you find the best solution for your financial situation.

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