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Can I refinance my HELOC?

How to refinance a home equity line of credit

Borrowers can refinance a home equity line of credit, or HELOC. It can be a way to get a lower interest rate or lower monthly payments. This guide explains how a HELOC works and various ways how to refinance.

Key Points:

  • There are several options for how to refinance a home equity line of credit (HELOC)

  • It can be helpful to refinance in order to secure a lower interest rate, change from a variable rate loan to a fixed rate loan, or lower monthly payments

  • The best ways to refinance start with talking to your lender directly to negotiate new terms or to replace your HELOC with a traditional home equity loan or a new HELOC

Can I refinance a HELOC?

Yes, there are several ways borrowers can refinance a HELOC. Often homeowners will do this in order to get a more competitive interest rate, to change from a variable-rate HELOC to a fixed-rate loan, or to reduce monthly payments.

What is a HELOC?

A home equity line of credit (HELOC) is one of the most popular ways to borrow against the value of a home. It is a type of home equity loan that works in a similar manner to a credit card, in that you can withdraw funds from a maximum credit limit, as opposed to receiving a one-time payment at the start of the loan. The loan begins with a draw period which usually lasts five to ten years. During this time borrowers can withdraw funds from the credit line, and only interest payments are required, however, borrowers can make larger payments towards the principal if they choose.

The draw period is followed by the repayment period. Many people refinance their HELOC when the draw period is coming to an end since this marks the start of the 10-20 year loan repayment period when borrowers cannot withdraw funds anymore and have to face extended payment obligations on both interest and principal due.

Unlike other types of loans, a HELOC holds strong appeal because it is secured by the borrower’s home thus providing them with considerable peace of mind that they can cover their debt in case of any defaults or need for additional funds. 

Should I refinance my HELOC?

Refinancing your home equity line of credit (HELOC) can be a great way to get extra funding for projects or reduce your loan payments. When you first take out a HELOC, you typically only have to pay interest on the loan during the draw period. However, at the end of this period, you may suddenly be faced with a much larger payment due if you have a variable interest rate and interest rates have risen since you applied for the loan. Refinancing can help by either reducing your monthly payments or giving you additional money to use on projects around your house or other investments.

There are 3 scenarios where it makes sense to consider refinancing your HELOC:

  • To change from a variable-rate HELOC to a fixed-rate HELOC

  • To get a lower interest rate

  • To reduce monthly payments during the repayment period

How to refinance a HELOC

Refinancing a HELOC is a worthwhile consideration to make if you want to reduce the interest rate on your home equity line of credit. This type of refinance process is quite similar to that of refinancing a standard first mortgage loan with one main difference: rather than applying for an additional loan, you are essentially choosing to pay off your existing HELOC with a new loan and potentially lower interest rate.

Qualifying to refinance a HELOC is similar to qualifying for a loan. Lenders usually require that you maintain around 20% of the equity in your home, and will examine the current market value of your home, as well as your credit scores. 

There are several ways to refinance a home equity credit line.

Talk to your current lender

Most lenders offer home equity assistance programs in the event that a borrower cannot afford the current payment schedule. Asking for a HELOC modification could result in lower interest rates, a longer loan period, or a lower monthly payment amount. Most lenders are open to modifications since their alternative—foreclosing on a property—is costly and requires additional resources.

Pay off your existing HELOC with a new HELOC

Opening a new HELOC can be an efficient way to get back on track with repayment and avoid paying principal payments in the short term. With this option, you will restart the draw period of the credit line, meaning that instead of making the regular required principal payments, you can just pay interest on the balance. This is particularly effective for homeowners who have built up some equity in their homes and want to buy some time before they start having to pay further down their debt. 

Look for a HELOC with a fixed-interest rate, such as Figure's,1navigates to numbered disclaimer  so there are no payment surprises, and pay close attention to closing costs and additional fees. 

Pay off your HELOC with a traditional home equity loan

Home equity loans can also be used to pay off your HELOC. However, keep in mind that this route may end up costing you more money in interest because of that lower rate. Compare interest rates and fees associated with each loan option before making a final decision. Additionally, review repayment timelines to ensure you can easily manage your monthly payments on the new loan.

Refinance your primary mortgage with your HELOC into a new primary mortgage

Refinancing your HELOC and current mortgage into a single mortgage could be an attractive way to save money on your total interest payments. Borrowers should consider whether closing costs associated with the new mortgage would offset any savings resulting from a lower rate. In most cases, taking out a new loan that includes both mortgages is only a good idea if you are able to secure a significantly lower interest rate.

The bottom line

Refinancing a home equity line of credit can be a way to get extra money for projects, reduce your monthly payments, or get a lower interest rate. There are several ways to refinance a HELOC, including replacing a HELOC with a new HELOC or traditional home equity loan. Before making any decisions, make sure to compare loan options, fees, and repayment timelines in order to determine which option will give you the best deal. It is important that you are able to manage the payments on the loan you choose.

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