If I refi my home, can I keep my HELOC?

Refinancing is a strategic way to get a better interest rate and improve your loan terms. However, if you have a home equity line of credit (HELOC), you might wonder: If I refi my home, can I keep my HELOC?

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In this blog post, we'll explore the reality of refinancing when you have a HELOC, your lender's possible stipulations, and options if you're required to pay off the HELOC.

If I refi my home, can I keep my HELOC?

Your HELOC lender ultimately decides whether the loan must be paid off when you refinance.

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A HELOC is secured by your home, meaning it acts as a lien on your property—specifically taking a subordinate position to your primary mortgage.

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Liens are prioritized in the order they're recorded, with the primary lienholder having first claim. This means if you sell the home or enter foreclosure, your mortgage lender gets first dibs on the proceeds, and your HELOC lender gets whatever is left.

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When you refinance, the new loan replaces the original mortgage lien. However, in this case, paying off the mortgage with a refinance loan shifts the HELOC into the first lien position and the refinance loan into second—a placement the new lender won't agree to. The refi lender will require the HELOC to be paid off or subordinated.

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You can ask your HELOC lender to be resubordinated, which means they agree to maintain second-lien position behind your newly refinanced mortgage. However, some lenders may decline your request, requiring the HELOC balance to be paid off before the refinance can proceed.

If my lender doesn’t require me to pay off my HELOC, what happens next?

To refinance and keep your HELOC, you'll go through the subordination process.

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Connect with the loan officer to inform them about the HELOC and your wish to go through the subordination process. They'll contact the HELOC lender on your behalf for details about the process, requirements, and fees. Then, provide any documentation requested.

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If you decide to go through the subordination, it's important to be mindful of:

• The impact on your refinance loan terms: It's possible your new lender will cap the loan-to-value (LTV) ratio on the refinance or even up your interest rate to account for the existing HELOC.
• HELOC restrictions: Your HELOC lender may limit further draws during the refinancing process.
• Timing: There will likely be delays in obtaining your new loan since the HELOC lender must review your documents and case. 

What are my options if I need to pay off my HELOC to refinance?

If you need to pay off your HELOC, consider leveraging a:

Cash payoff

If you have sufficient savings, using cash to pay off the HELOC is often the simplest solution. Once paid off, the HELOC is removed as a lien on your property. This clears the path for your refinance.

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Pros:

• You do not incur additional debt.
• The process remains straightforward, keeping your refinance simple and easy to manage.

Cons:

• Your cash reserves may be depleted, leaving you with fewer funds for emergencies or other expenses.
• This approach might limit your financial flexibility for other future needs.

Cash-out refinance

A cash-out refinance is like a refinance, except you’re also pulling cash from your equity in the process. It allows you to borrow more than the amount owed on your current mortgage and use the excess funds to pay off the HELOC. This will essentially roll your mortgage and HELOC into a new single loan.

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Requirements: You’ll need sufficient equity to cover both debts. Additionally, most lenders require a credit score of 620 or higher, stable income, and a debt-to-income ratio of 45% or less. 

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Pros

• It simplifies your debt by consolidating it into a single payment.
• You may secure lower interest rates compared to a HELOC.

Cons:

• The loan repayment term may be extended, leading to a longer time before the loan is paid off.
• Monthly payments may increase, putting more pressure on your budget.

Refinance the HELOC

If paying off the line of credit isn't feasible, you could refinance your HELOC separately. This involves replacing the existing HELOC with a new one—ideally with more favorable terms or rates. 

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When you refinance the debt, you'll start a new draw period and be on the hook for interest-only payments. This can delay your repayment period, giving you some breathing room—but it also increases the principal balance you'll be responsible for paying back.

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Requirements: In addition to sufficient equity, you'll need a credit score of 680 or higher, a reliable income stream, and a debt-to-income ratio of 43% or less to qualify for a HELOC refinance.

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Pros:

• You maintain access to a line of credit, offering flexibility for future financial needs.
• There is potential for better terms on your HELOC, such as a lower interest rate.

Cons:

• This option will not result in a mortgage refinance, meaning your original loan remains unchanged.
• There may be additional fees or closing costs associated with the process.

Home equity investment (HEI)

Another way to tap into the equity in your home is with an HEI. A home equity investment will give you a lump sum in exchange for a share of your home’s future appreciation. There are no monthly payments; you can repay the investment anytime during a flexible 30-year term when you refinance, sell the home, or use another source of funds. You can use the lump sum to pay off the HELOC and any leftover money you wish. 

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HEIs have less stringent requirements, which help homeowners with limited options due to their financial standing.

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Requirements: Sufficient equity, a credit score above 500, and no income or debt-to-income ratio requirements. 

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Pros:

• You won’t be taking on additional debt or monthly payments, which helps keep your financial situation more manageable.
• It is generally easier to qualify for, especially compared to other financing options.

Cons:

• You’ll need enough equity in your home to cover the cost of the HELOC, which may not be possible for all homeowners.
• There are appraisal fees and closing costs involved in securing an HEI.

Reverse mortgage

A reverse mortgage is another way to leverage your home’s equity and pay off your HELOC. Unlike a traditional mortgage, you do not have to make monthly payments. Instead, the loan is repaid when you sell the home, move out, or pass away. Reverse mortgages are designed for older homeowners (typically 62 or older) with limited income but substantial home equity.

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Requirements: Homeowners must be at least 62 years old, live in the home as their primary residence, and have sufficient equity in the home.

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Pros:

• There are no monthly mortgage payments, which can ease financial stress for retirees.
• Provides a steady income stream or lump sum, which can be used for any purpose.

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Cons:

• The loan balance increases over time due to accrued interest, which can reduce the amount of equity left in the home.
• If you or your heirs wish to keep the home, it must be sold or refinanced to repay the loan.
• Reverse mortgages carry many conditional requirements that homeowners must agree to when securing the loan. 

Frequently asked questions

Can I refinance if I have a HELOC?

Yes, you can refinance if you have a HELOC – however, there are some caveats. You will need to inform your HELOC lender about your refinance and get their permission, and a cash-out refinance may require you to repay your HELOC. 

What happens to my HELOC if I refinance?

If your lender agrees to subordination, your HELOC remains in place. However, if subordination isn’t an option, you may need to pay off the HELOC to proceed with refinancing. 

Can you lose your home if you default on a HELOC?

Yes, it's possible to lose your home if you default. A HELOC uses your home as collateral, so failing to make payments could result in foreclosure. Although the lender has the right to recover the debt by selling your property, most would prefer to avoid the cost and time spent on foreclosure. So, if you're struggling with HELOC payments, it's essential to connect with them immediately to discuss your options. 

Can you take out a home equity loan after refinancing?

Taking out a new home equity loan or HELOC after refinancing is possible, so long as you have enough equity and meet the lender's requirements. Keep in mind that any additional borrowing could increase your monthly obligations, leaving you potentially vulnerable in the long run. 

How can I get rid of my HELOC loan?

There are many ways to get rid of your HELOC loan. The easiest path is to pay it off in full using cash reserves or make extra payments to pay it off early. If you don't have enough money to throw at your HELOC, you'll likely want to turn to financing options. You can use home equity products like a cash-out refinance, home equity investment, or home equity loan to cover the cost. Although it's possible to use a personal loan, the higher interest rate and short repayment term generally make this a non-viable option.

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If you plan to sell your home, the HELOC can be settled using the proceeds from the sale. Alternatively, you could refinance the HELOC itself.  Ultimately, it's important to weigh your options carefully and select the one that aligns best with your financial goals and situation.

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Final thoughts

Getting the green light to keep your HELOC while you refi can be easier said than done. If your HELOC lender agrees to subordination, you're in the clear. Otherwise, it's best to explore your options—whether that be delaying your refinance, paying off the HELOC, or refinancing the HELOC itself. 

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Refinancing can be a powerful financial tool—understanding how it interacts with your HELOC ensures you maximize its benefits.

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Pay off your HELOC—and eliminate all monthly payments—with a Home Equity Investment from Point. You can prequalify without impacting your credit score here. 

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