Your guide to refinancing a HELOC

A home equity line of credit (HELOC) is a type of loan that allows you to borrow using your home equity without the rigid payment schedule of a traditional fixed-term loan. A HELOC is a popular choice for funding home improvement projects, large purchases, consolidating higher-interest debt, and other financial goals.

If you already have a HELOC and think you could qualify for a lower interest rate or want a larger credit line, refinancing a HELOC could make sense. Do you want to know: can you refinance a HELOC? Note that Rocket Mortgage does not offer HELOCs at this time, but keep reading to learn more about how HELOC refinancing works and if it could make sense for your unique financial situation.

Can you refinance a HELOC?

“HELOC” and “refinance” are two words that don’t often go together, but you can refinance a HELOC in many circumstances. To refinance a HELOC, you would need to meet the requirements for a new HELOC from a new lender. If you’re approved, you can use the new HELOC to pay off your old HELOC, effectively refinancing.

Refinancing a HELOC can offer several benefits. Depending on your goals, you could refinance for a lower interest rate, lower monthly payment, or larger credit limit. If your home has increased in t or your credit has improved since you took out the HELOC, you may be able to secure a new one with more favorable terms.

You can refinance a HELOC by applying for a new one of the same size or a larger size. When you close the new loan, you can make a draw on the new HELOC to pay off the old one, or you may be able to arrange having the new lender pay off the old loan for you.

Reasons to refinance a HELOC

Before refinancing a HELOC or any other loan, it’s essential to evaluate the financial implications and why you want to refinance. Some of these may be the same reasons you might have refinanced your first mortgage.

• Lower the interest rate: The top reason to refinance any loan is to capture a lower interest rate. A lower interest rate can save you many thousands of dollars over time, depending on the size of the loan and how much you can lower the rate.
• Avoid a large payment jump: Some HELOCs may allow lower payments, such as interest-only payments, for a period of time before requiring larger equity payments. Refinancing could help you avoid that pending lump sum or higher payment rate.
• Secure a fixed interest rate: Some loans have variable interest rates, which could lead to you paying more over time if rates rise. You could refinance and switch to a fixed-rate loan for more predictability.
• Extend the repayment period: If the monthly payments are too high, refinancing your HELOC with a longer term can lower your payments. Keep in mind that a longer term could lead to higher total interest costs, even if monthly payments are lower.
• Get better loan terms: Loans come with a range of terms, including different interest rates, fees, payoff periods, draw limits, and other details. If you find a loan that’s better aligned with your financial needs, it could be worth refinancing.
• Access increased equity: If you’ve made progress paying off your home or the value has increased significantly, refinancing could give you more home equity to work with.

Methods for refinancing a HELOC

When refinancing your HELOC, you have several options. However you proceed, you’ll need to start by gathering your records and financial information. Then, your lender will help you choose the best refinancing method and guide you through the application process.

1. Refinance to a new HELOC

When you refinance your HELOC with a new HELOC, you'll take out a new line of credit to pay off your existing one. This is the most direct way to refinance a HELOC, as you’re replacing one loan with a similar one that better meets your financial needs.

The advantage of this approach is that you'll start a new draw period with the new HELOC, which often means you can make interest-only payments until the repayment period kicks in. However, starting a new draw period when refinancing might tempt you to borrow more, potentially leading to a continuous debt cycle. Weighing these HELOC pros and cons is critical before taking out a new loan.

2. Pay off the HELOC using a home equity loan

Instead of another HELOC, you could also refinance using a new fixed-term home equity loan. In this case, you would use the lump-sum proceeds from the new loan to pay off the HELOC. Like a mortgage or car loan, you would make regular monthly payments until the balance is completely repaid.

The consistent monthly payments and potentially longer repayment period can make this an affordable choice and protect you from future interest rate increases. However, extending your term can lead to paying more interest over time. Comparing home equity loan costs and repayment terms to the existing HELOC can help you decide which is financially advantageous.

3. Pay down your HELOC with a cash-out refinance

A cash-out refinance means you refinance your first mortgage and receive additional cash at closing. If you use the funds to pay off your HELOC, you’ve refinanced two loans (your old mortgage and HELOC) with one new loan.

Benefits include having only a single monthly payment instead of two, and potentially lower interest rates or monthly payments. However, closing costs and fees can add up fast, and extending your mortgage term could lead to higher long-term costs or staying in debt longer.

4. Combine your HELOC and first mortgage into a single loan

While it can be a little more work, combining your mortgage and HELOC into a single mortgage may be the best financial option. Refinancing like this allows you to combine the loans into a single monthly payment, and a first mortgage typically offers one of the best interest rates available.

Combining the two into a single loan can save you money on interest while keeping your payment manageable. However, as with other loans, it’s possible that fees and interest rates could wind up more expensive, and signing up for a new mortgage could keep you in debt for a longer period of time. It’s also a bit more complicated, but experienced Rocket Mortgage experts can help you through the process.

5. Take out a personal loan

A personal loan is typically an unsecured fixed-term loan. You can use the proceeds from a personal loan to pay off a HELOC, which may offer some advantages. As with every other option on the list, it’s always best to compare the financial impact before moving forward.

A personal loan gives you a fixed time period to pay off the debt with steady and predictable payments. They also free you from having the debt tied to your home as collateral. However, personal loan interest rates are often higher than loans secured by a home, and costs may be higher in total than you would have paid with the HELOC.

Requirements to refinance a home equity line of credit

The requirements to refinance a home loan are similar to what you experienced when getting your first HELOC. Lenders review your home equity, credit score, debt-to-income (DTI), payment history, and other aspects of your finances to ensure you can afford the new loan.

Home equity determines how much you can borrow. Some lenders allow you to borrow more, but you’ll generally be allowed to borrow up to around 80% to 90% of the home’s value, including your first mortgage and HELOC. This is called the loan-to-value ratio, or LTV.

Credit score requirements vary by lender. You may pay less with a better credit score, which is helped by an on-time payment history. Lenders also look at your income compared to existing debts (debt-to-income ratio) to determine if you can likely afford the monthly payments.

How to refinance a HELOC: A step-by-step guide

If you’re refinancing a HELOC, you’ll follow these general steps to get through the process:

1. Understand your financial goals

Start by reviewing your finances and financial goals, then decide if a new HELOC makes sense and if you want to move forward. Whether your goal is lower monthly payments, a lower interest rate, or avoiding a large payment increase, there are many reasons to refinance a HELOC. Just make sure those reasons align with your personal finances.

2. Review your current balance and terms

Next, pull up your latest HELOC statement to understand the current balance and terms. Look at your repayment schedule, rates, and fees. You can also review your original loan documentation to check more detailed terms for how your HELOC works.

3. Evaluate your personal finances

Now look at your personal finances overall to get an idea of your likelihood of approval. Compare your credit score and DTI to the requirements published online by your preferred lenders. If you have a low credit score or high credit balances, you may want to improve them before applying for new credit.

4. Compare your refinance options

Next, it’s time to shop around and compare your options. Those include refinancing with another HELOC or other types of loans. After evaluating the costs and payment terms, you can hone in on the best refinance loan for your current goals.

5. Prepare your documents and then apply

Once you’re ready to apply, gather your supporting documents. Be prepared to enter your personal details, including your contact information and Social Security number. You’ll also likely need to provide your two most recent tax returns, as well as recent bank and investment statements. During the underwriting process, you may be asked for additional supporting documents.

6. Close on your new loan or HELOC

As the lender approves your loan, they’ll work behind the scenes to ensure the title, other home loans, and any additional documents are in order. At the closing, plan to sign your name many times to accept the new loan and to update the real estate records to show the new lender as a lienholder on the property.

At closing, you may have additional closing costs to cover, including application and credit fees, appraisal costs, and lender-imposed closing fees. You may be able to pay for those with the loan’s proceeds or use another payment method.

Pros and cons of refinancing a HELOC

If you’re still on the fence, here are some pros and cons of HELOCs to know:

Pros

• Lowers your monthly payments: If you refinance to a loan with a longer term or a lower rate, you could have a lower monthly payment than with your old HELOC.
• Switches from variable to fixed rate: A variable rate is beneficial when rates are falling, but you may want to lock in a fixed rate if you’re concerned rates may rise. Refinancing could allow you to switch from a variable to a fixed rate.
• Simplifies your finances: Refinancing could help you consolidate or streamline your debts, reducing financial clutter and cutting down the number of monthly payments.
• Avoids a large payment increase: If a big lump payment or increase is coming up, you can avoid it with a new HELOC.

Cons

• Requires closing costs or fees: Many HELOCs and other loans require closing costs, which can offset savings and drive up payments.
• Extends your repayment period: A longer repayment period can lead to lower payments, but also more months or years of debt on the tail end.
• May lose HELOC flexibility: If you refinance from a HELOC to a fixed-term loan, you lose the flexibility of a revolving credit line.
• Requires sufficient equity and credit: You’ll need enough home equity available to refinance with a new HELOC or home equity loan.

Alternatives to refinancing a HELOC

If refinancing a HELOC with one of the methods above doesn’t seem like the right choice, consider these HELOC refinance alternatives:

HELOC fixed-rate option

You may be able to convert your existing HELOC, or a portion of your outstanding balance, to a fixed-rate HELOC with stable monthly payments. This saves you the costs and effort of refinancing while providing the predictability of a fixed rate.

Loan modification

Some lenders offer loan modifications where they update the terms of an existing HELOC, such as a new rate or monthly payment terms. Again, this avoids the costs and challenges of a new loan while giving you some of the potential benefits.

Reverse mortgage

A reverse mortgage is a type of loan where you receive monthly payments instead of making them, slowly drawing on your home equity over time. Reverse mortgage loans are generally designed for older homeowners with significant home equity. Note that Rocket Mortgage does not offer reverse mortgages at this time, but we like to help make you aware of your options.

The bottom line: Is refinancing a HELOC a good plan?

A HELOC can be a helpful financial tool for a wide range of scenarios. If you’re ready to make a change from your current HELOC, refinancing your HELOC could be a good choice. Replacing it with a new HELOC, or wrapping it into a new mortgage, can be a savvy move.

If you’re considering refinancing a HELOC with a cash-out refinance, you can start the process to get preapproved with Rocket Mortgage today.

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Refinancing may increase finance charges over the life of the loan.