HELOCs are set up as a revolving line of credit, so you can borrow and repay money as needed until your loan reaches the end of its draw period. Then you need to start repaying the loan. These loans are popular because they typically have low interest rates. However, you may find you want to refinance your HELOC, such as if the variable interest rate increases. So, let’s learn more about your refinancing options and how they can help you secure better terms.
Refinancing Options for Your HELOC
Refinancing is when you take out a new loan to replace an existing one. While you often hear this term associated with first mortgages, you can also refinance other loans, such as a HELOC. You can either work with your original lender to create a new loan, or you can shop around and find better terms somewhere else. Either way, you’ll need to give the bank some information. You’ll typically need to provide a new lender with:
Your current loan balanceA current appraisal of your home’s current valueYour credit scoreProof of income and your employment historyA list of other debts you may have
Based on this information, a new lender will give you a quote for the terms and conditions of your loan. You can then compare those terms to your existing loan’s terms and decide if it’s worth refinancing. You can refinance your HELOC in several ways:
Modify Your HELOC
If you don’t want to take out a new loan, you may want to consider a modification. This is when your lender agrees to change the terms of your loan, such as the interest rate, monthly payment, or length of the loan. Modifying your loan can give you more time to pay it off. Additionally, your lender might agree to lock in your interest rate so it won’t increase. Some banks may not allow you to make modifications to your loan unless you’re having trouble making the payments. You may need to provide proof of financial hardship before your request is approved.
Take Out a New HELOC
You can refinance your HELOC by applying for a new home equity line of credit with your current lender or another bank. The process is similar to opening a HELOC for the first time. You’ll need to fill out an application and provide information about your home’s equity, credit score, employment, and income. After your application is approved, you can use your new loan to pay off your existing HELOC. One advantage of this option is that you might be able to get a better interest rate on your new loan or negotiate a longer draw period. This extends the amount of time you have to repay the loan. But there are downsides to consider. For instance, if you extend the repayment period, you’ll likely end up with a higher monthly payment when your new draw period is over.
Take Out a Home Equity Loan to Pay Off Your HELOC
If you don’t want the variable interest rate that comes with your HELOC, consider taking out a regular home equity loan. This is a lump-sum payment that you can use however you’d like, including paying off your HELOC. Often banks limit you to 80% of your home’s equity for these types of loans. So you’ll have to make sure you have built up enough equity to qualify.
Refinance Your HELOC Into Your Original Mortgage
When you have both a home equity line of credit and a mortgage, you make two monthly payments. If you want to make one payment, you can refinance your current mortgage and HELOC into a new mortgage, which could also help lower your monthly payment. A cash-out refinance is when you take out cash with your mortgage to pay off your HELOC. So, you’re cashing out the equity of your home and using that money. You might want to consider refinancing your mortgage if interest rates have declined. If you can secure a lower interest rate on your new loan, you can save money over the life of the loan. However, there are some downsides to consider with a cash-out refinance, such as the fact that you’ll have to pay closing costs, which can average $5,000.
How Are HELOC Refinance Rates Determined?
When you refinance your HELOC, your lender calculates an interest rate to offer you by evaluating several factors, including:
Your credit scoreThe value of your homeThe amount of equity you have in your homeCurrent market conditions
If you have a good credit score and a lot of equity in your home, you’re likely to get a lower interest rate. But if general market conditions aren’t favorable, you might end up paying a higher rate. HELOCs usually have variable interest, which means your rate changes over time. It’s calculated by using an index, such as the U.S. Prime Rate, which changes, and a margin, which is added to the index and does not change.
Alternatives to HELOC Refinancing
If you’re not sure whether refinancing your HELOC is right for you, consider some other options. You might be able to get a lower interest rate by:
Take Out a Personal Loan
In some cases, such as if your HELOC balance is fairly low, you might be able to take out a personal loan to pay it off. These loans typically have fixed interest rates, which can provide predictability. However, their interest rates are typically higher than rates on HELOCs. Many banks cap their personal loans to between $50,000 and $100,000. If you have a larger HELOC balance, this option might not be a good fit for you. If you don’t have good credit, it can be difficult to qualify for a personal loan. If you do qualify, you’ll likely have to pay origination fees. Finally, also consider any prepayment penalties or late-payment penalties with a personal loan.
Get Credit Counseling
If you’re struggling to make your HELOC payments, you can pursue debt relief options such as credit counseling organizations. Through these programs, you can work with a credit counselor to come up with a plan to pay off your debts. This can help you get out from under a high-interest HELOC and potentially improve your credit score.
Transfer Your Balance to a 0% Interest Credit Card
If you have good credit, you might be able to transfer your HELOC balance to a new credit card that offers 0% interest for a promotional period. However, this strategy carries significant risk. While shifting your debt to an interest-free credit card can give you some time to pay off your debt without accruing any additional interest charges, the 0% terms are not permanent. Be sure you’re fully prepared to pay off the card by the time the no-interest period ends, or you’ll likely face significantly higher interest rates than your HELOC rates. Be sure you fully understand the terms of the credit offer before you sign up. Some cards charge a balance transfer fee, and the promotional period might be shorter than you expect. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
