Homeowners

Can You Refinance Your HELOC?

Many homeowners have been waiting with bated breath for mortgage rates to fall so they can refinance their loans and enjoy lower payments.

However, some of those same folks don’t realize they may be able to save money by refinancing their Home Equity Lines of Credit (HELOCs) as well.

Yes, it’s possible to refinance a HELOC. If interest rates have dropped or your credit score has gone up since you took out the loan, it could save you money. This could help you cut your monthly payments and reach your financial goals.

“If the borrower’s financial situation has improved, they may be able to lower their rate,” said Keith Gumbinger, vice president of HSH.com, a mortgage resource website.

Whether your reason is to save money on interest or get additional time to pay off your balance, let’s look at when is a good time to refinance a HELOC and what your options are should you choose to do so. 

When does it make sense to refinance a HELOC?

Refinancing a HELOC does come with fees and additional paperwork, so you want to ensure it’s worth the effort. It may make sense if you’ll reap significant savings on interest charges or if it will help simplify your debt payment, among other reasons.

Your draw period is ending

A HELOC typically has a draw period of five to 10 years, during which time you can take out the money. When that ends, you enter the repayment period. If you’re near the end of yours and want to extend the draw period, refinancing could be the solution.

Interest rates have fallen

If you’re in the repayment period of your HELOC and see that interest rates have fallen, you may want to explore refinancing your loan. A lower rate has the potential to save you money each month.

Your credit score is higher

You may also be able to lock in a lower rate on a HELOC if your credit score or income has improved. Lenders look at these when considering a borrower’s risk and determining the mortgage rate to offer them. The higher your score and income, the lower the risk. This may help you qualify for a more competitive rate, even if overall interest rates haven’t fallen. 

You want to roll your debt into a new loan

Juggling multiple loan payments can feel overwhelming, even if you have systems in place for you to remember to make payments. 

Instead, you may want to consider making loan payments more manageable by rolling your HELOC into another one. That way, you’re paying down one larger loan instead.

Options for refinancing a HELOC

If refinancing a HELOC makes sense for your financial situation, you have several options, including:

• A new HELOC: You may be able to speak to your current or a new lender about refinancing your HELOC into one with new rates and terms. After refinancing, you will likely have a new draw and repayment period.
• Second mortgage: With one of these home equity loans, which is a loan in addition to your existing mortgage, you may be able to borrow a lump sum to pay off your HELOC. 
• Cash-out refinance: A cash-out refinance is where you replace your primary mortgage with one that has a larger loan amount. You’ll receive the difference as cash, which you can use to pay off your HELOC. You are then left with one larger loan that you repay every month. 
• Reverse mortgage: Designed for those aged 62 and older, a reverse mortgage allows you to retain ownership and tap into your home equity. You can then use the proceeds to pay off your HELOC. Loan repayment isn’t required until you move out of the home or pass away. 

How to refinance a HELOC

Refinancing a HELOC is similar to refinancing other types of home loans. You find a loan that meets your needs, submit an application and any necessary documentation, and sign closing documents.

In many cases, you may need to go through a home appraisal to assess your home’s fair market value.

Speak with your lender first to see if there are any retention offers or incentives it can offer you to keep your business.

“Lenders may be able to reset or refinance your line of credit,” Gumbinger said. “But if you don't reach out, you may miss a chance to get what you need.”