Can You Refinance a HELOC

Whether you’re searching for ways to access more cash or want to avoid fluctuating monthly payments, you may want to refinance your home equity line of credit (HELOC). In doing so, you can possibly score a better fixed rate or avoid monthly payments altogether. Before you proceed, though, you need to weigh the advantages and disadvantages.

So, can you refinance a HELOC? Is it possible? We’ll tell you all you need to know about it, but before anything else, we’ll start by answering this question.

Is HELOC Refinancing an Option?

Yes, you can definitely refinance your HELOC. If you continue reading, you’ll learn several ways to do it. Refinancing can also help you accomplish certain financial goals, such as reducing your interest rate or getting more time to repay what you owe.

HELOC Refinancing Requirements

Refinancing your HELOC could add a buffer to your budget and help you pay down your debt more effectively. First, you must qualify with your lender. Eligibility criteria vary, but most lenders weigh the following considerations:

• Home Equity: You’ll need enough home equity to refinance your property. That’s the difference between your home’s value and your mortgage balance. Most lenders require a combined loan-to-value (CLTV) ratio between 80% and 85%. It means you’ll need at least 15% to 20% equity in your home.
• Debt-to-Income Ratio: When you apply to a refinance broker California to refinance your HELOC, the lender will analyze your debt-to-income ratio (DTI) to evaluate your ability to repay the loan. Lenders usually look for a DTI of 43% or less, which means no more than 43% of your gross monthly income should go toward monthly debt payments.
• Credit Report and Score: Try to achieve a credit score of 680 or higher. Some lenders may approve your loan with a lower credit score, but expect to pay a higher interest rate in that case.

When to Refinance a HELOC

Refinancing can be useful in many scenarios to achieve certain goals. These include:

• Lowering Your Interest Rate: You may want to refinance if you qualify for a lower interest rate, which could reduce your interest costs and monthly payments.
• Switching to a Fixed Rate: Generally, HELOCs come with variable rates that can rise with little advance warning. If you prefer predictable payments, you might consider refinancing into a fixed-rate HELOC or home equity loan.
• Extending Your Repayment Term: If you need some wiggle room in your budget, refinancing can add a few extra layers to your repayment term, say from 20 years to 30 years, to lower your monthly payments. Remember that this could significantly increase your total cost.
• Avoiding a Payment Spike: Is your draw period expiring soon? If so, you may wish to stave off principal and interest payments once the repayment period starts. When you refinance into a new HELOC, you restart the draw period with interest-only payments. While this option delays the start of principal repayment, it might increase your total interest charges in the long run.

6 Ways to Refinance a HELOC

Can you refinance a HELOC? We’ve already told you that you can, but how? Here are six ways to make it happen:

Modify Your Current HELOC

Sometimes, the simplest solutions are the most effective. If you just want to lower your monthly payment, contact your lender and request an adjustment to your current HELOC. This isn’t technically a refinance but a loan modification. However, upon approval, you can make your payments more manageable by extending your repayment term or lowering your interest rate.

Open a New HELOC

Another way to get more favorable HELOC terms is to take out a new HELOC to pay off the old one. This lets you reset your draw period while postponing your repayment period. In this instance, the biggest benefit and drawback of this strategy are the same: a new HELOC will extend your draw period and postpone your repayment period.

This option may make sense if you’re sure you can afford the payments after you enter the repayment period. Think twice if you anticipate your income staying the same or decreasing.

Pay Off Your HELOC With a Home Equity Loan

This option could help you replace a variable-rate HELOC with a fixed-rate home equity loan. Unlike a HELOC, which allows you to make periodic withdrawals during the draw period as needed, a home equity loan gives you a lump sum upfront. You’ll repay in fixed monthly installments over a set term – usually between 5 and 30 years. Also, keep in mind that you’ll likely pay closing costs between 2% and 5% of the loan amount.

With a fixed interest rate, your loan payments won’t rise if interest rates increase. However, this strategy might not significantly lower your monthly payments and could lead to higher total interest costs if you refinance into a longer repayment term.

Pay Off Your HELOC With a Cash-Out Refinance

Another way you can refinance a HELOC is through a cash-out refinance. In this case, you’d have to take out a new first mortgage for more than what you owe and use the difference to pay off your previous mortgage, as well as your HELOC. Ideally, your new loan will have lower monthly payments and a lower, fixed interest rate.

As with any loan option, it’s important to consider the risks. You’ll use more of your home equity, which increases the chance of going underwater on your home loan if property values drop. A higher interest rate could also mean a bigger monthly payment. And unless you choose a shorter term, it may take even longer to pay off your mortgage. Along with that, you’ll pay closing costs, which usually range from 2% to 6% of the loan.

Refinance Your HELOC and Mortgage with a New Mortgage

If you don’t want to use your home equity again, you may consider combining your HELOC and current mortgage into a new first mortgage without pulling cash out. This type of refinance could simplify your finances with a single loan and one payment. The new loan will typically come with new terms.

This strategy might seem more sensible if the new home loan comes with a lower interest rate or you want to switch from a variable rate to a fixed one. It could also help you avoid the large payment increase that can happen when a HELOC shifts from the draw term to the repayment term. However, these loans tend to be more complex, and you’ll want to weigh the closing costs against how much you’ll actually save to determine if refinancing is worth it.

Take Out a Personal Loan

With strong credit, you may qualify for a personal loan up to $100,000, which could be enough to pay off your HELOC balance. Consider this option if you want to get out of a variable-rate HELOC and want to switch to a simple, fixed monthly payment without using your residence as collateral.

Keep in mind, your payment might increase for a few reasons. Firstly, personal loan terms typically range from two to seven years, which is considerably shorter than most HELOCs. Secondly, they don’t require collateral. This means personal loans often have higher rates than HELOCs. Based on the most recent Federal Reserve data, the average interest rate on a two-year personal loan is 11.66%. Meanwhile, HELOC interest rates are hovering around 8%.

Tips for Refinancing a HELOC

The following tips should help you refinance wisely:

• Understand Both Sets of Terms: Before you refinance, look closely at your current HELOC terms to know your rate, balance, repayment period, and fees. Then, compare the details with the new loan to make sure you’re saving money instead of spending more.
• Plan Ahead for Closing Costs: You should try to save up some money to pay the closing costs when refinancing a HELOC. These costs include fee appraisals and title services, and typically range from 2% to 6% of your loan amount. You can either pay them upfront or roll them into your new loan. Keep in mind, if you include them in the loan, you’ll pay interest on those fees.
• Watch Out for Prepayment Penalties: Since it’s a line of credit and not an installment loan, you can usually pay off a HELOC early without any prepayment fees. Nonetheless, you need to confirm with your lender to avoid any surprises. Also, ask whether the loan you’re refinancing into has a penalty for early payoff. These fees vary by lender, but typically range from 1% to 5% of the loan amount, which could eat into any savings you’re aiming for.
• Consider the Risks of Borrowing More Equity: Refinancing lets you borrow more against your home, but be careful. If home prices fall, you could end up owing more than your home is worth. That makes it harder to sell or refinance again. As a general rule, it’s wise to borrow only what you truly need.
• Shop Around Before Choosing a Lender: Lenders set their own rates, terms, and fees, so it’s smart to compare multiple offers before you commit. These offers could come from your current lender, local credit unions, and online lenders. Even a small rate difference of 0.5% to 1% can save you thousands over the life of the loan, especially if your balance is large or your repayment term is long.

HELOC Refinancing Alternatives

Consider the following alternatives if you don’t want to refinance or modify your HELOC:

• Sell Your Home: If you’re planning to move or struggling to make your HELOC payments, selling your home may give you enough cash to pay off your balance, as long as the sale price is high enough to cover both your primary mortgage and your HELOC.
• Explore Reverse Mortgages: If you’re 62 or older and have significant home equity, a reverse mortgage could help eliminate your monthly HELOC payments using your equity. A reverse mortgage gives you access to your property’s equity without monthly payments. The loan is repaid when the home is sold, you move out, or you pass away. However, this option comes with high upfront costs and risk, and lowers the equity in your home.
• Apply Windfalls: A tax refund, work bonus, inheritance, or other lump sum could help you pay down or eliminate your HELOC balance without refinancing or taking on new debt.
• Use a 0% Intro APR Balance Transfer Credit Card: If your HELOC balance is low and you have good credit, you may be able to transfer it to a credit card with a 0% introductory APR. The promotional period lasts up to 21 months, which may give you enough time to pay off the balance interest-free. Just remember that once the intro period ends, the rate jumps to the card’s standard APR, which is usually much higher.

Get Your Credit Together Before Refinancing a HELOC

Can you refinance a HELOC? Yes, you can! Now, you might choose to refinance a HELOC to reduce your interest rate, get a fixed rate, or adjust your repayment timeline. Whatever you do, don’t forget to review the different ways to refinance and consider all alternatives. That’s how you can determine the best path for your situation. Before you apply, check your credit score to see if it meets a lender’s minimum requirement. After that, a refinance broker California can help you with the rest.

FAQs

1. Can I Refinance My HELOC Even If I Have Poor Credit?

It’s possible to refinance with poor credit, but it may be harder to qualify for favorable terms. Some lenders offer options for lower credit scores but expect higher interest rates.

2. How Does Refinancing a HELOC Affect My Credit Score?

A2. Refinancing can temporarily lower your credit score due to the hard inquiry. However, if you manage the new loan responsibly and reduce your debt, it can improve your score over time.

3. What Is the Difference Between Refinancing a HELOC and Modifying It?

Refinancing a HELOC means replacing it with a new loan, while modifying it means changing terms of your existing loan. Refinancing may offer better terms, but it may come with higher costs.

4. Can I Refinance My HELOC if I Have a Fixed-Rate Mortgage?

Yes, you can refinance your HELOC even if you have a fixed-rate mortgage. However, ensure the new loan’s terms are beneficial, considering potential interest rate changes and associated fees.

5. Are There Penalties for Paying Off My HELOC Early?

Some HELOCs have prepayment penalties, especially if they’re refinanced into a fixed-rate product. Always check with your lender to avoid unexpected fees that could impact your savings from early repayment.