Can you refinance a HELOC?

A home equity line of credit (HELOC) is a type of second mortgage that allows you to borrow using your home equity as a revolving line of credit that you can draw from as needed over a set period. 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, refinancing¹ a HELOC could make sense. You could replace it with a new HELOC, convert the balance into a fixed-rate home equity loan², use a cash-out refinance, or combine your primary mortgage and HELOC into a single consolidated loan.

Note that Rocket Mortgage does not offer HELOCs at this time, but here’s a closer look at how HELOC refinancing works and if it could make sense for your unique financial situation.

Key takeaways:

• Borrowers can refinance a HELOC by securing a new credit line, converting to a fixed-rate home equity loan, or consolidating the HELOC and primary mortgage into a single cash-out refinance.
• Lenders typically require borrowers to maintain 15% to 20% equity in their home, hold a credit score of 680 or higher, and demonstrate a manageable debt-to-income (DTI) ratio.
• Refinancing fees and closing costs generally range between 2% and 6% of the loan amount, making it essential to ensure monthly savings outweigh upfront expenses.

Yes, you can refinance a HELOC

If you qualify, you can refinance a HELOC. Refinancing a HELOC means taking out a new credit line or mortgage to pay off your existing home equity line of credit. The new financing pays off the original HELOC balance, replacing it with updated terms, a new interest rate structure, or a reset repayment timeline.

Depending on your goals, you could refinance for a lower interest rate, lower monthly payment, longer draw period, larger credit limit, or to consolidate multiple housing debts into a single payment. If your home has increased in value or your credit has improved since you took out the HELOC, you may be able to secure a new one with more favorable terms.

To refinance a HELOC, you’ll need to meet the requirements for a new HELOC from a new lender. 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

Let’s look at some of the common reasons why homeowners choose to refinance their HELOC:

• Get a lower interest rate: The top reason to refinance any loan is to capture a lower interest rate. A lower interest rate can save you 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.
• Lock in a fixed interest rate: HELOCs typically come with 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.

When is a good time to refinance a HELOC?

The timing of your refinance can play a big part in whether it’s beneficial and worthwhile.

Near the end of your draw period

A HELOC is divided into a draw period and repayment period. The draw period – which typically lasts 5 - 10 years - is when you can draw from the line of credit as needed and make interest-only payments. After that, you’ll enter the repayment period, where borrowing closes and full principal-and-interest payments begin. The repayment period typically lasts 10 - 20 years. Refinancing shortly before the draw period ends helps you avoid a sudden jump in your monthly payments.

When you want fixed payments

If rising market interest rates are causing your variable HELOC payments to increase, refinancing into a fixed-rate loan gives you more predictable monthly payments. You can also set a loan term that makes these payments fit into your budget.

When your equity or credit has improved

If your credit score has increased since taking out your original HELOC, you may qualify for more favorable interest rates and lower fees. If the value of your home has risen and you have more equity, this can give you more borrowing power.

Methods for refinancing a HELOC

Let’s walk through the four primary ways you can refinance your HELOC.

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. 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. This resets your 5- to 10-year draw period, provides a new variable rate, and may increase your credit limit if your home value has increased.

However, starting a new draw period also means paying more overall interest. 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. A home equity loan is a second mortgage that delivers a single, fixed-rate lump sum paid back in equal monthly installments over a set term - usually 5 - 20 years.

In this case, you would use the lump sum from the new loan to pay off the HELOC, then make regular monthly payments until the balance is 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 replace your first mortgage with a new, larger loan and withdraw the difference in cash. If you use the funds to pay off your HELOC, you’ve refinanced two loans - your old mortgage and HELOC - with one new loan.

As a result, you’ll only have a single monthly payment instead of two. If interest rates have dropped since you took out your mortgage and HELOC, you could get access to 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 can be a smart move if current interest rates are favorable. 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, it’s also possible that fees and interest rates could wind up more expensive. Also, signing up for a new mortgage could keep you in debt for a longer period of time.

5.  Take out a personal loan

A personal loan is typically an unsecured fixed-term loan. You can use the money from a personal loan to pay off a HELOC, which may offer some advantages. A personal loan gives you a fixed time period to pay off the debt with steady and predictable payments. It also frees 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.

6.  Talk to your lender about new terms

Before applying for a new loan elsewhere, contact your current HELOC lender. Your existing financial institution may offer a fixed-rate conversion option that allows you to lock in fixed rates on existing balances. They may also offer a formal loan modification to extend your draw period without requiring a full refinance.

Requirements to refinance a home equity line of credit

The requirements to refinance a HELOC 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 and LTV

The amount of home equity you have determines how much you can borrow. Lenders evaluate your loan-to-value (LTV) ratio - the total combined mortgage debt against your home's appraised value.

Most lenders require borrowers to maintain at least 15% to 20% equity in the property after accounting for all loans - meaning a maximum combined LTV of 80% to 85%.]

Credit score and DTI

While credit requirements vary by lender, you’ll typically need a credit score of 680 or higher to refinance your HELOC. A better score can help you unlock a lower interest rate.

Lenders will also consider your debt-to-income ratio (DTI), which is a figure that compares how much of your monthly income must go toward your debts. If you’re refinancing your HELOC, lenders typically want to confirm your DTI does not exceed 43%.

Closing costs and fees

Refinancing a HELOC or replacing it with a new home loan incurs closing costs, which typically range between 2% - 6% of the loan balance. Fees may include origination charges, title search fees, credit reporting fees, and appraisal costs.

Documents and appraisal considerations

Lenders will review income documentation to make sure you can afford your new loan. Much like when you took out your original mortgage and HELOC, you’ll be asked to provide pay stubs, W-2s, tax returns, and bank statements. Lenders usually require a home appraisal to verify current market value to make sure you have enough equity.

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

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

1. Understand your financial goals: Start by reviewing your finances and financial goals. Determine whether your main objective is lowering monthly payments, locking in a fixed rate, extending a draw period, or consolidating debt.
2. Review your current balance and terms: Check your current HELOC statement for remaining balance, interest rate type, remaining draw time, and potential early payoff penalties. 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 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 same-lender and another-bank options: You can refinance a HELOC with your existing lender or shop across other financial institutions. Compare interest rates, loan structures, and closing fee quotes to locate the best deal.
5. Prepare your documents and then apply: Gather pay stubs, tax filings, and bank statements, then submit your formal application.
6. Close on your new loan or HELOC: Sign final loan documents, pay applicable closing costs, and ensure your new loan disburses proceeds to satisfy and close out the old HELOC lien.

Pros and cons of refinancing a HELOC

Be sure to consider the potential benefits and downsides of refinancing a HELOC to help you decide if it’s the right move for you.

Pros

Some of the potential perks of refinancing a HELOC include:

• Lower 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.
• Switch 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 or you want predictable payments. Refinancing could allow you to switch from a variable to a fixed rate.
• Consolidate debt: Allows you to combine a HELOC and primary mortgage into a single monthly payment.
• Avoid a large payment increase: If a big lump payment or increase is coming up, you can avoid it with a new HELOC.
• Reset draw window: Opening a new HELOC provides renewed access to revolving equity for ongoing projects.

Cons

It’s also important to be aware of the potential downsides of refinancing a HELOC, including:

• Upfront closing costs: Paying 2% - 6% in closing costs can offset short-term interest savings.
• 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’d like to help make you aware of your options.

FAQ

Here are the answers to some frequently asked questions about refinancing a HELOC.

Is it a good idea to refinance a HELOC?

Refinancing a HELOC is a good idea if you can get a lower interest rate, lock in predictable fixed payments, prevent an upcoming repayment jump, or lower your total borrowing costs after factoring in closing fees.

Can I refinance a HELOC during the draw period?

Yes, you can refinance a HELOC at any point during its draw period, if you meet lender qualification standards, home equity minimums, and credit requirements.

Do I need a home appraisal to refinance a HELOC?

Yes, most lenders require an appraisal during the refinancing process to confirm the property's current value and calculate the amount of available equity you have.

Will refinancing affect my credit?

Yes, applying to refinance a HELOC triggers a hard credit check, which lowers your credit score by a few points but only temporarily.

Can I refinance with the same lender?

Yes, you can refinance a HELOC with your existing lender or apply with a different financial institution. Comparing quotes across multiple lenders ensures you secure competitive rates and lower closing fees.

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

Refinancing a HELOC can be an effective way to get lower fixed interest rates, lower monthly payments, reset draw periods, or consolidate your primary mortgage and line of credit into a single loan. Be sure to evaluate upfront closing costs against your projected monthly savings to ensure refinancing advances your financial goals.

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.

¹ Refinancing may increase finance charges over the life of the loan.

² Home Equity Loan Product is a second standalone lien and may not be used for piggyback transactions. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Not available on Ameriprise products. Additional restrictions, terms, and conditions apply. Must meet qualification requirements. This is not a commitment to lend.