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 home equity line of credit (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.

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—there are several ways to refinance a home equity line of credit.

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.  

One thing to keep in mind: refinancing comes with closing costs. These can include things like application fees, appraisal costs, and title fees. Depending on your lender and loan size, these fees can add up, so be sure to factor them into your overall decision.

And just like with your original HELOC, your home is used as collateral. That means if you default on the new loan, your home could be at risk of foreclosure—so it’s important to make sure the new terms are manageable for the long haul.

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What you’ll need to refinance your HELOC

A lender will evaluate your financial health and equity more stringently than they did when you first applied for a HELOC. ‍

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.

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

Refinance 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.

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.

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

Pros: A new HELOC gives you the flexibility of a fresh draw period and extended repayment terms, allowing for lower monthly payments. It can also help you access additional funds if needed.

Cons: You’ll still be paying interest on your previous balance while also rolling it into a new term. If the new interest rates are higher, your payments could increase.

Best for: Borrowers who want to extend their draw period and lower monthly payments while keeping their financial flexibility.

Pay off the HELOC 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.

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.

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

Pros: It can give you access to additional funds beyond your HELOC balance, which can be used for other investments or large expenses. It also provides the stability of fixed monthly payments, so you're protected from fluctuating interest rates.

Cons: A cash-out refinance typically involves higher closing costs and more paperwork than other options. Additionally, your loan balance may increase, as you're replacing your existing mortgage with a new, potentially larger one. You may also face a longer repayment term.

Best for: Borrowers who want to pay off their HELOC in full, consolidate debt, and secure predictable, fixed monthly payments over the long term.

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.

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.

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

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.

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

Consolidate your HELOC and first mortgage

Merging your HELOC with your primary mortgage into a single loan can make your financial life more straightforward. By combining both loans, you’ll have just one payment with updated terms, potentially making it easier to manage your debt.

Pros: If you're able to secure a lower interest rate, consolidating your loans could save you money over time. Plus, with one loan instead of two, you’ll have fewer payments to track, simplifying your finances and reducing the risk of missed payments.

Cons: This process can be a bit more complicated and often comes with additional paperwork. You’ll also face closing costs, which can add to the overall expense.

Best for: Borrowers who want to simplify their finances or those seeking a potentially lower interest rate.

Pay down your HELOC with an HEI

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.

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.

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.

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.

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.  

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.

Refinancing might make sense when:

• You want to lower your monthly payments: Extending your repayment term or securing a lower interest rate through refinancing can make your monthly payments more manageable.
• You’re looking for a better interest rate: If rates have dropped or your credit has improved since you first took out your HELOC, refinancing could help reduce your interest costs over time.
• You want more predictable payments: Some homeowners refinance into a fixed-rate product—like a fixed-rate HELOC or a cash-out refinance—to avoid the uncertainty of variable interest rates.
• You need access to more equity: Refinancing may allow you to tap into additional home equity if your property has increased in value.
• You want to consolidate debt: If you're juggling high-interest debts, refinancing your HELOC could be a way to consolidate and streamline payments.

Frequently asked questions

Can you refinance if you have a HELOC?

Yes, you can refinance your primary mortgage even if you have a HELOC, but the process can be more complex. Lenders often require the HELOC lender to agree to "subordinate" the loan, meaning they stay in second position behind the new mortgage. Alternatively, you can refinance both the mortgage and the HELOC into a new loan or refinance the HELOC on its own.

Is a HELOC a second mortgage?

Yes, a HELOC (home equity line of credit) is typically considered a second mortgage because it’s secured by your home and comes in addition to your primary mortgage. Unlike a traditional mortgage, a HELOC works more like a credit card—you can borrow, repay, and borrow again during the draw period.

What are HELOC refinance alternatives?

When looking for alternatives to refinancing a HELOC, there are a few options you can consider. One alternative is a loan modification, where the terms of your existing loan are adjusted to make your payments more affordable. This could involve extending the loan term, lowering your interest rate, or even reducing the loan balance, depending on your lender’s guidelines. Another option is selling your home. By selling the property, you can pay off both your first mortgage and your HELOC, using any remaining proceeds for other financial needs or investments. If staying in the home is no longer a priority or if the property is no longer a good financial fit, selling can help you move forward.

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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.

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.