When you become a homeowner, there are many new financial opportunities at your fingertips: a home equity line of credit (HELOC) being one of them. If you’re currently utilizing one, you might be wondering, can you refinance a HELOC?
Yes, you can refinance a HELOC. And there are multiple options to consider based on your repayment goals and timeline.
HELOCs are a useful way to make your equity work for you—you can borrow at a lower interest rate than with a personal loan or credit card and use the cash for any purpose. You can use a HELOC for home improvement uses, medical or educational costs, or business opportunities.
Do you need more time or better terms on a current HELOC? Below we’ll take a look at the what, when, why, and how of refinancing, with five approaches to restructuring a HELOC—plus a bonus option to pay it off in full without taking on any new debt.
What Is a HELOC?
A home equity line of credit is a pool of money you can access that’s secured by your property.
HELOCs are often discussed hand-in-hand with traditional home equity loans, but one of the key differences is that you won’t receive a lump sum of cash if your application is approved. Instead, once you’ve learned how to qualify for a HELOC and are approved, you are then granted access to a credit line with a maximum limit—anywhere from $10,000 to $1 million depending on:
- The market value of your home
- Your home equity (market value minus what you owe on your current mortgage)
- The equity percentage your HELOC lender lets you borrow—usually 85%
How Does a HELOC Work?
So, how does a HELOC work? The first phase of a HELOC is the draw period, which usually lasts 5 to 10 years. During this time, your HELOC is a bit like a credit card. If you don’t use it at all, then you don’t have anything to repay.
During the draw period, you can take out and repay up to your credit limit as often as you like. For example, if you’re approved for a $50,000 HELOC, you can take out $30,000 in the first month, repay $20,000 within the first two years, take out $40,000 in the fourth year, and so on. You’ll need to make:
- Interest-only payments, plus
- Repayments of principal only to the extent needed if you want to re-borrow funds.
Once the draw period is over, you no longer have access to take out HELOC funds, and the repayment period—typically 10 to 20 years—begins. During this stage, you’ll make monthly payments on the balance of what you owe plus interest.
The Role of Interest Rates
HELOCs have a variable interest rate, which means the rate of interest you’re charged will increase or decrease as the Federal Reserve adjusts the federal funds interest rate.
The good news is that we’re nowhere near the historical high of the early 1980s when the prime rate hit 21%. On the downside, we’re currently in a fast-rising period after a record low of 3.25% in 2020 and 2021.
As of August 2023, the prime rate was 8.5%, and the average HELOC rate was 8.74% (based on a $30,000 HELOC for a borrower with a 700 credit score and a combined loan-to-value ratio of 80%).
Why Refinance a HELOC?
For most, the jump from interest-only payments during the draw period to principal-plus-interest monthly bills when the repayment period kicks in is an unwelcome change—and for some, that increase can be devastating.
Depending on how you do it, refinancing a HELOC can:
- Reduce or eliminate your monthly HELOC repayments
- Lock in a fixed interest rate instead of a variable
- Extend your draw period
- Push the larger repayment period amounts further out into the future
When to Consider Refinancing Your HELOC
Refinancing is common based on either an individual HELOC stage or changes in available interest rates. You may want to consider a refinance:
- Before your draw period ends and repayment begins
- If you’re unable to make repayments and your home is at risk
- To switch to a fixed-rate debt if interest rates fall
There are no limits on refinancing your property or equity loans and lines of credit—you can initiate it whenever and as often as makes sense to you. However, keep in mind that:
- Refinancing isn’t free—you’ll pay closing costs of 2%–5% of the HELOC loan amount each time
- Putting off a repayment period is a pause, not a fix
- You’ll owe more in total interest
- Interest rates are in a fast-growth period; beware of changes that include a higher rate
Options for Refinancing Your HELOC
There’s more than one way to shoe a horse. You can achieve a refinance of your current HELOC in several different ways:
Ask for a New Deal
Ultimately, lenders want their borrowers to keep paying off their loans—and some will be open to negotiation to make that happen. If your circumstances have changed or you’re experiencing difficulty making payments, the first step is to communicate with your current HELOC lender.
If your loan is in good standing and you have a consistent payment history, you can ask to renegotiate for:
- A reduction in interest rate
- A switch to a locked-in rate
- Lower monthly payments
- A longer repayment period
Pros of renegotiating with your current lender:
- Potential changes to your loan terms that benefit your budget
- May be able to avoid closing costs
- No lender-shopping, document-gathering, or loan application process
- Lender may not be willing to make the concessions you need
- Missing out on a better deal from a new lender or refinancing arrangement
Open a New HELOC
If you can meet the borrower requirements, you could open a new HELOC large enough to pay off your balance, either through your current lender or after shopping around for a new one.
- Removing foreclosure risk if you can’t meet repayment period amounts
- A new HELOC puts you back at the starting line of a five- to ten-year draw period
- With discipline, you can start repaying during the new draw
- You’re basically buying time—it’ll cost you more in total interest
- If you have difficulty budgeting, a new draw period may encourage unwise behavior
Refinance into a Home Equity Loan
Taking out a home equity loan and paying off your HELOC can work if a predictable monthly payment is a top goal. Unlike a HELOC, home equity loans are lump-sum, fixed-rate loans.
- Unchanging monthly payment amounts to budget for
- A fixed interest rate instead of the ups and downs of a variable-rate HELOC
- No interest-only payments; you’ll make principal-plus-interest payments immediately
- Although fixed, your interest rate may be relatively high on a home equity loan in 2023
- You won’t have a revolving line of credit that allows you to borrow only what you need
Refinance into a New Primary Mortgage
How about wiping the slate clean and starting over? Instead of refinancing a HELOC alone, you can apply for a new primary mortgage that rolls your HELOC balance into the total alongside what you owe on your existing mortgage.
- One monthly payment instead of two or more
- A single lender to negotiate with
- Opportunity to choose a different loan term
- No more access to a line of credit
- Unless your current mortgage was taken out near or before the turn of the century, you may end up with a jump in interest from your current primary mortgage, which could cost you significantly more in overall interest paid—as of August 2023, the average 30-year fixed mortgage rate was 7.42%.
Refinance into a Cash-Out Refinance Mortgage
There are several differences between HELOC vs cash-out refinance. Similar to a new primary mortgage, a cash-out refi allows you to switch from multiple payments and lenders into a single primary loan. Instead of rolling your HELOC into the mortgage total, however, a cash-out refinance allows you to borrow:
- The amount to pay off your current primary mortgage, and
- A negotiated amount of cash back to use as you choose—in this scenario, you would use it to pay off your HELOC balance.
The pros and cons list match up to the option above (refinancing into a new primary mortgage). There is one additional con, however: Aside from today’s overall high rates, cash-out refi interest rates tend to be one-quarter to one-half percentage point higher than a traditional primary mortgage.
Explore a Sale-Leaseback as a HELOC Refinance Alternative
How about a program that unlocks the funds to pay off your current HELOC and mortgage while staying in your home? A sale-leaseback is a debt-free option to convert your equity to cash without the need to pack your life into boxes and find a new place to lay your head.
You’ll close on the sale of your property to an investor-landlord, and at the same time sign documents that provide:
- The legal right to remain in your home as a renter for as long as you choose
- A first-year lease with an agreed-upon rent rate
- Locked-in rent rate for a number of years
- A transparent procedure to anticipate and calculate future lease increases
You can refinance a HELOC in order to reduce or simplify monthly payments, delay or extend your repayments, or seek out better terms.
Depending on your goals and timeframe, you can renegotiate with your current lender, take out a new HELOC or home equity loan, or apply for a roll-in primary mortgage or cash-out refinance.
Finally, if you want to pay off your HELOC and primary mortgage without taking on new debt, you can consider a sale-leaseback and continue living in your home as a renter.
- The Mortgage Reports. What’s the maximum HELOC amount? Guide to HELOC limits. https://themortgagereports.com/96211/maximum-heloc-amount
- FRED. Bank Prime Loan Rate Changes: Historical Dates of Changes and Rates. https://fred.stlouisfed.org/series/PRIME
- Bankrate. Prime rate, federal funds rate, COFI. https://www.bankrate.com/rates/interest-rates/prime-rate/
- Bankrate. Best home equity line of credit (HELOC) rates for August 2023. https://www.bankrate.com/home-equity/heloc-rates/
- Investopedia. Home Equity Loan Fees vs. Mortgage Loan Fees. https://www.investopedia.com/home-equity-loan-fees-vs-mortgage-loan-fees-5324701
- Bankrate. Compare current mortgage rates for today. https://www.bankrate.com/mortgages/mortgage-rates/
- Bankrate. Are cash-out refinance rates higher? How to get the best rate. https://www.bankrate.com/mortgages/how-to-get-the-best-cash-out-refinance-rate/