Refinancing a HELOC: Options, Benefits, and Requirements

Homeowners looking for ways to lower monthly payments, secure a fixed interest rate, or manage home equity debt may consider refinancing a home equity line of credit (HELOC). Refinancing can be done by replacing your existing HELOC with a new loan, which can be done a variety of ways. This guide explains the most common HELOC refinancing options, when refinancing can make sense, and what to consider before deciding to move forward.

Can You Refinance a HELOC?

In many cases, homeowners can refinance a home equity line of credit (HELOC). Depending on your goals, there are several ways to do so, including:

• Paying off your existing HELOC with a new HELOC.
• Refinancing into a home equity loan.
• Combining your HELOC and mortgage into a single home loan.
• Paying off your HELOC through a cash out refi.

Ultimately, the best option for you depends on factors such as the amount of home equity you have, current interest rates, debt obligations, and whether you're looking for more consistent monthly payments.

To give you an idea of how refinancing a HELOC might work in practice, let's say you currently have a variable interest rate HELOC and you're concerned about rates going up. Refinancing into a fixed-rate loan can provide a more predictable repayment schedule, which could make your housing costs more manageable and reduce the uncertainty that comes with changing interest rates.

When to Refinance a HELOC

The right time to refinance a HELOC depends on more than just your financial situation and long-term goals. Interest rates and market conditions also play an important role in determining whether a HELOC refinance makes sense for you.

That said, right now might be a good time to refinance if you:

Want to delay higher payments when your HELOC’s draw period ends: Many HELOCs have a draw period (also called a borrowing period) when borrowers can make interest-only payments on the amount of money they've withdrawn. When the draw period ends, monthly payments can increase significantly because you'll begin repaying both principal and interest. If your HELOC is approaching the end of its draw period, refinancing may help delay the higher payments that typically begin during the repayment period.

Want to lower your interest rate: If interest rates have dropped since you first opened your HELOC, or if your credit has improved and you'd like to see whether you qualify for a lower rate, refinancing may be worth considering. Qualifying for a lower rate could help reduce your total borrowing costs and may lower your monthly payments, but keep in mind that the total finance charges may be higher over the life of the loan with a refinance.

Need a more predictable payment schedule with a fixed rate: Homeowners with a variable-rate HELOC may find that changing interest rates make it difficult to budget over time. Refinancing may help provide a more predictable payment schedule, which can help streamline your budgeting efforts.

Need to access additional funds: If you need extra money for a home improvement project, debt consolidation, or another large expense, refinancing may help you to borrow against more of the equity you've built in your home.

Even if you decide that now isn't the best time to refinance your HELOC, that doesn't mean it won't make sense later on as your needs and market conditions can change.

Options for Refinancing a HELOC

There are a few different ways you can refinance a HELOC, each coming with its own features, requirements, and benefits.

Refinance Into a New HELOC

One option is to take out a new HELOC and use the proceeds to pay off your current HELOC. If you meet the lending requirements for a new HELOC, you may be able to start a new draw period, delay repayment, and potentially qualify for a lower interest rate. This option might make sense if you want to maintain access to the equity available in your home.

Keep in mind that opening a new HELOC typically extends the amount of time you can borrow and delays the start of repayment. As a result, if you continue using the line of credit during the new draw period, you may increase the amount you owe and the interest you'll pay over time.

Use a Cash Out Refinance

Another way to refinance a HELOC is through a cash out refinance. With this option, you borrow enough against your home's equity to pay off your current HELOC and mortgage, then roll everything into a new mortgage. Essentially, you're replacing your existing mortgage with a new loan that pays off both the mortgage and HELOC, leaving you with a single monthly payment.

If you qualify for a lower interest rate with a cash out refinance, this could translate to a single, predictable monthly payment. However, cash out refinances typically come with closing costs and fees.

Refinance a HELOC Into a Home Equity Loan

Similar to a HELOC, a home equity loan lets you borrow against your home's equity. However, instead of accessing funds as needed throughout the draw period, you'll receive the money in a lump sum and repay it over a set period of time. If you choose a fixed-rate home equity loan, your monthly payment will remain the same throughout the loan term.

Just keep in mind that home equity loans may come with fees and closing costs, which can range from 2% to 5% of the loan amount. In addition, while choosing a longer repayment term may lower your monthly payments, it could increase the total amount of finance charges you pay over the life of the loan.

Consider a Personal Loan

For borrowers who have a strong credit profile, a personal loan may provide enough funds to pay off a HELOC and replace it with a loan that has fixed monthly payments without requiring you to use your home to secure the loan.

However, while personal loans can offer fixed rates and predictable payments, the monthly payment could be higher than what you're paying now. Personal loans typically have shorter repayment terms, usually two to seven years, than most HELOCs. Since personal loans don’t have collateral, interest rates are usually higher, which can increase your total cost to borrow.

Ask Your Lender About Loan Modification

While a loan modification is not technically considered a refinance, it lets you make changes to your current HELOC and achieve some of the same goals. However, a loan modification is typically used in situations where a borrower is experiencing financial distress or hardship. Depending on your lender, you may be able to convert a variable interest rate to a fixed rate, adjust your repayment terms, or increase your credit limit.

Just remember that loan modification options vary from lender to lender, and not all borrowers will qualify.

If you'd like to explore loan modification options, contact Freedom Mortgage to learn what programs may be available based on your loan and financial situation.