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A home equity line of credit (HELOC) offers a lot of flexibility. You have a draw period – often a decade – when you can take out dollars and pay only on the interest.
But after that ends, the repayment phase starts, when you are required to pay the principal as well as interest and may be subject to fluctuating interest rates that can be costly. Fortunately, you can choose to refinance your HELOC in a few different ways, which may result in a lower rate and more manageable payments.
Find out if and how refinancing HELOC is permitted and recommended, the pluses and minuses of a HELOC refi, different ways to refinance, whom refinancing works best for, and when to time your refi.
Is it possible to refinance a HELOC?
The good news is that you should be allowed to refinance your HELOC whenever you want, although restrictions and rules will depend on your lender.
“Refinancing a HELOC is indeed possible. It involves replacing your existing HELOC with a new credit line or another type of loan,” explains Liam Hunt, director and analyst with SophisticatedInvestor.com. “The feasibility and rules for refinancing will depend on several factors, including your lender’s policies, current market conditions, the amount of equity accrued in your home, and your credit score” (more on this later).
Consider that HELOCs have become more popular in recent years, with HELOC balances increasing by $3 billion since the first quarter of 2022, per data from the New York Federal Reserve. One big reason behind the surge in HELOCs has been the dramatic rise in mortgage rates, making HELOCs a more attractive option for liquidating equity than cash-out mortgage refinances.
The right time to refi your HELOC
The ideal time to refinance a HELOC is before the end of your draw period, which is the phase when you can withdraw funds from the line of credit. This period usually spans 10 years.
“After the draw period concludes, you enter the repayment phase where you can no longer draw funds and must start repaying both principal and interest,” notes Hunt.
That’s when your payments could jump significantly unless you refinance your HELOC.
“Another favorable time to refinance is when interest rates are lower than your current HELOC rate, even well before the draw period expires,” Hunt adds. “But it might not be advisable to refinance if interest rates are higher than your current rate if you don’t have enough equity in your home, or if the closing costs of refinancing outweigh the benefits.”
» MORE: See today’s refinance rates
Pros and cons of refinancing your HELOC
The benefits of refinancing a HELOC are obvious: You stand to pay less interest overall if you can lock in a lower interest rate with a new HELOC or another loan. And that translates to more manageable payments that fit your budget.
Perhaps the biggest drawback is that you’ll have to pay closing costs, which can vary based on your chosen refinance product. Closing costs for a fresh HELOC or other new loan will typically set you back 2% to 5% of your total loan cost.
Options for refinancing a HELOC
There are a handful of viable ways to refi your HELOC. Here are four of them:
- Get a new HELOC to replace your existing one. This way, you can reset your draw period to a fresh 10 years and kick your repayment period down the curb. But realize that you’re going to have to repay eventually, and the longer you delay the more total interest you will pay. “This option offers continued flexibility. But it can lead to a cycle of perpetual debt if it’s not managed carefully,” warns Dennis Shishikov, adjunct professor of economics at City University of New York.
- Get your HELOC modified or converted. Reach out to your current lender and ask for a HELOC loan modification/adjustment. If they say yes, your payments could be lower if the interest rate is decreased or more flexible if the repayment terms are extended. You may have to demonstrate a financial challenge or hardship to qualify, however. Or, request that your adjustable-rate HELOC be converted to a fixed-rate HELOC if permitted.
- Refi to a new home equity loan. Pay off your HELOC with a home equity loan that yields a lump sum payout at closing and must be repaid over a fixed period, often five to 30 years. The fixed rate offers the peace of mind of stable, consistent payments and will likely be lower than your HELOC adjustable rate. But you’ll pay closing costs (2% to 5% of your loan amount) with this option.
- Opt for a cash-out refi. Alternatively, replace your HELOC with a cash-out refinance of your primary mortgage loan. Here, you can liquidate some of your home’s equity at closing, the funds for which can go toward paying off your HELOC. This option can make sense if the fixed rate on the cash-out refi is lower than your HELOC adjustable rate. But you’ll reset your primary mortgage loan and may end up paying more in total interest over the life of that loan than you would have with the HELOC; as with option #3 above, you’ll also surrender more of your equity, and you could owe more on your home than your property is worth if real estate values dip. Plus, closing costs apply. “A complete mortgage refinance can consolidate your debt, but it might come with higher overall costs in the long run,” says Shirshikov.
Good candidates for refinancing a HELOC
Doug Van Soest, co-founder of So Cal Home Buyers, explains that HELOC refinancing can benefit many borrowers.
“Those burdened by high current interest rates, adjustable-rate risks, or high-interest debt consolidation needs may find significant savings and improved financial stability by transitioning from their adjustable-rate HELOC to a fixed-rate HELOC with a lower interest rate,” he says.
Case in point: Say you have a $50,000 balance on a HELOC that currently charges 8% interest. If you refinance to a new HELOC with a 5% fixed rate, you could save $1,500 annually, according to Van Soest.
“Or, say your HELOC with a $50,000 balance as a variable rate that’s currently low at 5%. If you could refinance into a home equity loan at a fixed rate of 4% for 10 years, it could reduce your interest costs and provide predictable monthly payments,” adds Hunt.
Ideal prospects for a HELOC refi are those who have significantly improved their credit score or have more equity in their home since the original HELOC opened.
“For example, if you took out a HELOC for home improvements you might find that these upgrades have increased your home’s value, making you a good candidate for refinancing,” Shirshikov continues.
To qualify, count on meeting the necessary criteria, too. Your debt-to-income (DTI) ratio (which indicates your monthly debt obligations versus your gross monthly earnings) should be no higher than 43%. Also, you may need a credit score of at least 680 to be eligible.
And many lenders prevent you from borrowing more than 80% of your home’s combined loan-to-value ratio (the total sum of all loans/debts against your property divided by your home’s value). In other words, count on having at least 20% accrued equity.
What to consider carefully
If higher HELOC adjustable rates have kicked in or are nearing, now’s the time to ponder a HELOC refinance. Weigh the pros and cons carefully, ponder the total costs of refinancing, including fees and potential longer-term interest payments, and get good advice on your best options by speaking with lending professionals and personal finance experts.
In addition, “examine your existing HELOC agreement carefully, consult with different lenders, and weigh potential savings against refinancing costs,” Marty Zankich, director and owner of Chamberlin Real Estate School, suggests.
“Also, assess whether the reasons for refinancing are short-term relief or aligning with long-term financial goals,” advises Shirshikov.