How to Refinance a HELOC

Many homeowners opt to refinance their mortgage to take advantage of lower interest rates or to restructure their payment plan. You can also refinance a home equity line of credit, or HELOC, for the same reasons.  

Taking out a HELOC is a straightforward way to tap your home’s equity -- often at an interest rate that’s lower than what you’ll get with other types of financing. This type of loan lets you borrow against the equity in your home -- that is, the value of the home above what you owe on the mortgage -- and works, in some ways, like a credit card.

One of the major benefits of a HELOC is that you can elect to make interest-only payments during the draw period; this means you can borrow a significant sum of money over an extended period while only making minimal payments. Once the repayment begins, however, your monthly payment will increase as you’re required to make payments toward your principal loan balance and the interest. When that happens, it may be advantageous to refinance your HELOC.  

“End of draw is absolutely a relevant time to think about refinancing [a HELOC],” says Vikram Gupta, head of home equity at PNC Bank. “It can be a bit of a payment shock, and refinancing allows you to keep making those minimum payments,” he says. 

It’s crucial to recognize that a HELOC is a loan secured by your home, so whichever refinancing option you choose, make sure you can comfortably afford your new monthly payment. If you default on this type of loan, your lender can repossess your property.  If your draw period is coming to an end and you’re looking for ways to keep your monthly HELOC payment low, or you simply want to lock in a lower interest rate, refinancing could be an option. Below, we outline some of the ways to refinance a HELOC.

6 ways to refinance a HELOC

There are multiple ways to refinance a HELOC, and the best one for you will depend on such factors as how much equity you have in your home and your current interest rate. “Refinancing a HELOC can be advantageous if you’re looking to get away from a variable-rate to lock in a fixed-rate, or if you’re trying to avoid the payment shock of a HELOC that has come to the end of its draw period and will now require larger principal and interest payments,” says Greg McBride, chief financial analyst at Bankrate, CNET’s sister site.

Ask your lender to work with you

Perhaps the simplest way to refinance your HELOC is to request a new deal from your current lender. Some banks and lenders may be willing to renegotiate the terms, reduce or lock in your interest rate or extend your loan term. At the end of the day, lenders want their loans paid back, and they may be open to compromise -- especially if you have a consistent payment history. “Ask your current HELOC lender if they will fix the interest rate on your outstanding balance,” says McBride. “Nothing ventured, nothing gained.”

Refinance into a home equity loan

Refinancing into a home equity loan eliminates the uncertainty of a variable interest rate and provides you with a lump sum of cash. And a home equity loan’s fixed interest rate may look even more appealing now, as interest rates continue to rise. 

Take out a new HELOC

You can take out a new HELOC to pay off your existing HELOC. This will open a new draw period and allow you to keep making interest-only payments for years before once again getting hit with higher monthly principal payments. That noted, you are essentially kicking the can down the road -- and setting yourself up for even bigger monthly payments once your new draw period ends. This is a risky and potentially unsustainable move -- and should be undertaken with caution. 

Shift your debt to a personal loan

Personal loans often have higher interest rates than other types of loans -- including, usually, HELOCs -- because they are unsecured. On the upside, a personal loan won’t require you to put your home up as collateral.

Refinance your HELOC into your mortgage

Another option is to consolidate your HELOC and your primary mortgage into one new mortgage -- if you can get a lower interest rate, of course. You could also adjust your loan term. Shortening it would increase your monthly payment but decrease the total interest you’ll pay over the life of the loan. Extending it would lower your monthly payment, but you’ll pay more in interest over the term of the loan.  

Complete a cash-out refinance

A cash-out refi can net you a lump sum of cash at a fixed interest rate, similar to a home equity loan. But a cash-out refi usually makes sense only if you can lock in a lower interest rate -- which is unlikely for most homeowners in the current economic climate.

How to qualify for HELOC refinancing

Qualifying for HELOC refinancing is similar to applying for a mortgage. A lender will evaluate factors including:

• How much equity you have in your home: Lenders typically want to see at least 15% to 20%.
• Your credit score: Lenders generally look for a minimum score of 620, though you may need a 700 or higher to qualify for the lowest rates.
• Your debt-to-income ratio, or DTI, defined as your monthly expenses divided by your gross monthly income: Lenders will be looking for a DTI of 43% or less.
• Your combined loan-to-value-ratio, or CLTV, which is the value of your property compared to all of your outstanding loan and mortgage balances.