Your Guide To Refinancing A HELOC

Whether you're looking for ways to make your debt more manageable or just want to lower your monthly payments, refinancing your HELOC might be something to consider. Refinancing can help you get a lower interest rate and reduce your monthly payments, making it easier to manage your finances.

A HELOC, or home equity line of credit, is like a second mortgage that lets you borrow against your home’s equity. You can use this money for all sorts of things, like paying for education or finally tackling that home improvement project. You may consider refinancing after a few years, especially if interest rates are high or the payments once the borrowing period ends are too much to handle. Refinancing can help with these issues.

But before you jump in and apply, weigh the pros and cons to determine whether refinancing your HELOC is the right move for you.

Can You Refinance A HELOC?

You can indeed refinance a HELOC if you meet specific requirements set by lenders. Refinancing a HELOC can help you secure a lower interest rate, change the payment structure, or even access additional funds.

Lenders typically evaluate your home equity, credit score, and debt-to-income ratio to determine if you qualify. Meeting your lender’s requirements is important because it allows you to unlock the benefits of refinancing. By qualifying, you can secure better loan conditions, such as lower interest rates and more favorable payment terms.

Requirements To Refinance A Home Equity Line Of Credit

Before you start the HELOC refinancing process, it's important to know what lenders typically require for approval. Here's a quick rundown of what you'll typically need to qualify:

• Home equity: Most lenders want you to have a certain amount of home equity to qualify for refinancing. While the exact amount can vary by lenders, it’s best to aim to have at least 20% equity in your home. To determine your equity amount, your lender will request a home appraisal to assess the property's value. For example, if your home is worth $350,000 and the remaining balance on your mortgage is $200,000, you have $150,000 in equity, which is over 40%.
• Credit score: Your credit score tells lenders how financially responsible you are and how well you manage credit. Most lenders look for a score of 680 or higher. Having a higher credit score can help you secure a better interest rate and expand your refinancing options.
• Debt-to-income ratio (DTI): Your debt-to-income (DTI) ratio compares your monthly debt to your gross monthly income. Most lenders prefer a DTI ratio of 43% or lower. This helps your lender gauge how much of your income is already going toward debt and assess your ability to manage new payments.
• Payment history: When you apply for a home equity line of credit, your record of on-time payments is important. It’s another key factor that shows lenders how well you manage debt. Missed or late payments, which may appear on your credit reports for 7 years, could make it tougher to secure a HELOC.

Reasons To Refinance A HELOC

Refinancing your HELOC can be beneficial for several reasons, some similar to why you might have refinanced your first mortgage. Here are some reasons why you may want to refinance your HELOC.

• Lower interest rates: If you got your HELOC when interest rates were higher, refinancing now could secure you a lower rate. This means you could pay less over time and lower your monthly payments.
• Secure a fixed rate: Many HELOCs come with variable interest rates. In other words, your rate can increase over time, which can cause your payments to go up. Applying for a HELOC refi with a fixed-rate loan can give you more predictable payments, making it easier to budget.
• Extend the repayment period: When your HELOC's draw period ends, your payments can also increase as you enter the repayment period. Applying to refinance your HELOC can help you manage this transition by extending the repayment period or adjusting your loan terms. However, since this option lets you take on more debt, it’s not always the best option.
• Get better terms: If your credit score or financial situation has improved since you first got your HELOC, you might qualify for better terms. This could mean a lower interest rate or better repayment terms, potentially saving you money in the long run.
• Access increased equity: As you pay off your HELOC, your home’s value might increase. Refinancing can be a smart way to tap into this increased equity, giving you access to more funds.

Methods For Refinancing A HELOC

When it comes to refinancing your HELOC, you have several options. First, gather 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, you'll take out a new line of credit to pay off your existing one. This can be a simple option, especially if you find a lender offering better terms. Some lenders might even let you move the balance of your current HELOC into a new one with better terms. However, there are some pros and cons to consider before deciding if this method is right for you.

• Pros: The advantage of this approach is that you'll start a new draw period with the new HELOC. Usually, this means you'll only need to make interest payments until the repayment period kicks in. Plus, you have the opportunity to qualify for a lower interest rate and more predictable monthly payments.
• Cons: Starting a new draw period when refinancing might tempt you to borrow more, especially if you're already struggling with payments. This could keep you in a debt cycle that could be hard to get out of.

2. Pay Off The HELOC Using A Home Equity Loan

Another option is to use a home equity loan, essentially a second mortgage, to pay off your HELOC. With a home equity loan, you'll receive a lump sum and start repaying it immediately at a fixed interest rate.

• Pros: The consistent monthly payments and potentially longer repayment period can make this an affordable choice and protect you from interest rate hikes.
• Cons: Extending your loan term can lead to paying more interest over time. Plus, home equity loan rates are often higher than those for HELOCs.

3. Pay Down Your HELOC With A Cash-Out Refinance

A cash-out refinance means you refinance your first mortgage and use the extra funds to pay off your HELOC. You get the leftover amount in cash, which you can use to pay off your HELOC balance. In other words, you combine your HELOC with your new mortgage, so you only have to make one monthly payment.

• Pros: You might secure a lower interest rate or extend your repayment term, making payments more manageable.
• Cons: Cash-out refinances come with their own set of closing costs and fees, which can add to your borrowing costs. Also, by extending your mortgage term, you may pay more interest over time, keeping you in debt longer.

4. Combine Your HELOC And First Mortgage Into A Single Loan

Combining your HELOC and first mortgage into one new mortgage can simplify your finances. This approach merges both loans into a single payment, usually with new terms and conditions.

• Pros: If you qualify for a lower interest rate and better terms, you can save money. Plus, combining both balances into one payment can make managing your debt easier.
• Cons: This strategy can be complex and involves a lot of paperwork. You'll also need to consider closing costs. The added expense and application process only make sense if you can significantly lower your interest rate.

Key Tips For Refinancing A HELOC 

Here are some tips to help you navigate the HELOC refinancing process with ease:

• Save up for closing costs. Refinancing usually involves closing costs, which can be frustrating. These fees cover appraisals, title insurance, and more. It's a good idea to budget for these expenses now to avoid surprises later. While HELOC closing costs are typically less tha