Can you refinance a HELOC?

Whether you’re looking to access more cash or simply want to avoid fluctuating monthly payments, you may be tempted to refinance your HELOC. By doing so, you can potentially score a better, fixed rate or avoid monthly payments altogether. However, before proceeding, it’s important to weigh the pros and cons. 

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In this article, we’ll discuss everything you need to know about refinancing a HELOC, including when it makes sense for your financial situation, what refinancing options are available, and alternative options to explore.

Can you refinance a HELOC?

If you’re wondering, “Can I refinance a HELOC?” the answer is yes—you can refinance into a new home equity line of credit or via a cash-out refinance.  

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Refinancing your HELOC works similarly to taking out any equity product. After submitting your application, you'll undergo the underwriting process, where your eligibility will be evaluated. A lender will verify your income, assess your creditworthiness, and appraise your home's value.  

What you’ll need to refinance your HELOC

Qualifying for another HELOC or cash-out refinance is usually more challenging. A lender will evaluate your financial health and equity more stringently than they did when you first applied for a HELOC. 

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Lenders pay close attention to:

• Debt-to-income ratio: Each lender has their own guidelines. However, most lenders prefer a DTI ratio of 40% or less. To increase your chances of getting approved for a HELOC refinance, make sure your mortgage, student loans, credit card debt, and other personal loans don’t exceed 43% of your gross income.  
• Home equity: Ideally, your home equity has grown since you first took out your HELOC. Lenders will require that you own 15-20% of your equity outright. 
• Credit score: Has your credit improved or declined since obtaining your HELOC? If you have a credit score of at least 680, you’ll have an easier time getting approved. 
• Income: Lenders also want to ensure that you’re able to pay back the amount you intend to borrow. You may need to submit your employer’s name and phone number, recent pay stubs, two years of W2s, and your most recent tax return. Income requirements vary from lender to lender. 

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Lenders will need to see certain documents to evaluate your eligibility. By being prepared, you can help streamline the process. Be ready with: 

• Property information: Lenders need to know where your property is located and how much you’ve paid toward property taxes, homeowner’s insurance, and HOA fees. This helps them accurately assess your home’s property value.
• Personal identification documents: Lenders also want to make sure you’re the rightful owner of the property, so you’ll need to provide a government-issued ID such as a driver’s license or passport. If you’re applying with a spouse or co-owner, they’ll need to provide identification as well. 
• Details of existing debts: Lastly, you’ll need to provide lenders with information on all of your outstanding debts, including your current HELOC, student loans, car loans, credit card debts, and other personal debts. This helps lenders assess your total DTI ratio. 

How to refinance a HELOC

Your primary options are: 

Refinancing into a new HELOC

When you refinance into a new HELOC, you replace your existing one with an entirely new HELOC. Instead of immediately paying back your first HELOC, you start a new 10-year draw period, after which you enter a new 10-, 15-, or 20-year repayment period. 

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The balance on your first HELOC is rolled into the second and paid off at the end of the new term. However, you will still need to pay interest on the first balance.

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Your new payment terms and timeline will depend on your outstanding balance, current interest rates, and other factors important to your lender. 

Refinancing with a cash-out refinance

Refinancing a HELOC into a cash-out refinance allows you to pay off your HELOC balance in full, replace your existing mortgage, and pocket any money left over. 

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Since a cash-out refinance involves a new mortgage, you'll also get a new term and rate. Your new mortgage term and rate will depend on your financial health, market conditions, and other factors important to your lender. 

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You'll begin repayment almost immediately, with fixed monthly payments. 

When does it make sense to refinance your HELOC?

Whether it's a good idea to refinance your HELOC will depend on various factors, such as lending conditions and your financial situation. 

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Refinancing into a new HELOC makes sense when:

• You want to change the repayment period: Refinancing can extend the repayment period, giving you lower monthly payments.
• You can secure a better interest rate: Securing a new HELOC with lower interest rates can reduce your monthly payments and overall interest costs.

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Refinancing with a cash-out refinance makes sense when:

• You want repayment stability: Unlike a HELOC, a cash-out refinance can offer a fixed interest rate.  As a result, you're protected from market fluctuations, providing stability and predictability in your monthly payments. 
• You can secure a lower mortgage rate: Since a cash-out refinance displaces your current mortgage rate, scoring a lower one could save you hundreds or even thousands over the course of your loan. 

HELOC refinancing alternatives

If a HELOC refinance doesn’t fit your current situation, here are three HELOC refinancing alternatives to consider:

Replace your HELOC with a home equity loan

Instead of refinancing your HELOC, consider using a home equity loan to pay off the balance. A home equity loan allows you to use the funds to close out the HELOC. Payments on a home equity loan are then made in equal installments over 10-30 years at a fixed interest rate. Borrowers usually start repaying the loan as soon as they take it out.

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By switching your line of credit into a loan, you can access a lump sum of cash which you can use to pay off high-interest debt or fund a venture that may need a large deposit upfront, such as an investment property. 

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Pro: Turning your HELOC into a home equity loan offers predictable monthly payments. 

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Con: You could potentially increase the amount of interest you pay in the long run. When you’re able to secure a lower interest rate, this isn’t that much of an issue. However, home equity loans usually come with higher interest rates than HELOCs. 

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Best for: Borrowers who want fixed monthly payments without changing their current mortgage rate.  

Get a home equity investment

Home equity investments (HEIs) allow borrowers to obtain cash upfront in exchange for a portion of their home’s future appreciation. It’s not a loan or debt but an investment in your property’s equity. Since there’s no restriction on how you can use the funds, you can pay off your HELOC balance and pocket any leftover cash. 

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HEIs offer no monthly payments over a 30-year repayment period. You can buy back your equity at any time as a lump sum payment through either the sale of our home or a refinance. 

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Pros: HEIs are attractive financing options because they offer no monthly payments, don’t change your mortgage terms or rates, and have less strict eligibility requirements. 

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Con: Since repayment is based on your home’s future value, the cost of repayment is unknown. However, many companies offer customer protection by having a cap on what can be owed. 

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Best for: An HEI is best for homeowners who don’t want to take on additional debt or have to pay back any kind of monthly installments.  

Leverage a reverse mortgage

If you're 62 or older, reverse mortgages allow you to access the equity in your home as a lump sum, revolving line of credit, or a combination of both. Similar to the other products mentioned above, you can use your funds to pay off your existing HELOC and keep any remaining cash. Your reverse mortgage becomes due when you sell your home or pass away. 

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Pro: You won’t have to worry about monthly payments.

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Cons: Reverse mortgages have strict requirements for keeping your loan in good standing. Additionally, they’re not the most flexible loan if you want to pass your home to an heir. 

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Best for: Borrowers who want to avoid monthly payments and can meet all the criteria while they live out their golden years. 

Final thoughts: Is it a good idea to refinance your HELOC? 

Refinancing a HELOC may be a good idea if you can lower your monthly payments, switch to a fixed interest rate, or consolidate multiple loans into one. However, the key determining factor should be whether or not you’ll be able to pay back the HELOC refinance at a later date. If the answer is no, be careful with acquiring more debt.

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Achieve greater financial freedom and stability with a Home Equity Investment from Point. Homeowners benefit from no monthly payments, flexible credit evaluations, and the ability to use the funds as they need. Learn more about Point’s HEIs here.