How to Refinance a HELOC: Advantages and Requirements

Like any mortgage debt, a HELOC can be refinanced.

Refinancing a HELOC can save money by lowering the interest rate or by locking in a fixed rate that won't go up later.

Can You refinance a HELOC?

Absolutely, you can refinance a HELOC, and it’s often a smart move for homeowners who are seeking better borrowing terms than their HELOC offers. Refinancing replaces an existing home equity line with a new loan or line of credit.

To justify its costs, the new loan should offer something the current loan doesn't offer. Usually this is a lower interest rate or a fixed interest rate which can save money over time.

Borrowers can also refinance to stretch out their repayment term which can lower monthly payments, though this can cost more in the long run.

HELOC refinancing process

Here’s how the refinancing process typically works:

1. Evaluate your current HELOC: Check the balance and interest rate on your current HELOC. Review its repayment schedule so you'll know exactly where you stand. There's probably no need to refinance a HELOC that's almost paid off.
2. Explore options: Shop with at least three different lenders. Mortgage specialists like Better usually have multiple loan choices, so you're more likely to find one that meets your goals.
3. Apply for refinancing: Once you've compared a few quotes and found a lender and loan type that meets your needs, it's time to make the application official.

....in as little as 3 minutes – no credit impact

Should you refinance your HELOC?

You should refinance a HELOC only when the benefits of refinancing outweigh the costs.

The answer to this question depends on your unique situation.

Advantages of refinancing a HELOC

Refinancing a HELOC can:

• Lower your interest rate: If rates have gone down since you opened your HELOC, refinancing can lower borrowing costs. A lower interest rate cuts your monthly payments and saves money over the repayment period.
• Decrease monthly payments: Even if you don't cut your rate, extending your HELOC's repayment term can lower monthly payments. There's a trade-off here. Keeping the long longer will add to long-term interest costs.
• Create more stability: Most HELOCs feature a variable interest rate, causing unpredictable monthly payments. Refinancing into a home equity loan or a cash out refinance usually sets level payments, simplifying budgeting.
• Consolidate multiple payments: If you have a HELOC and a primary mortgage, you could refinance both into one loan. This is often a good idea when rates have dropped.
• Access more equity: If your home’s value has increased, refinancing your home equity line lets you borrow more, creating a larger line of credit for projects or to repay high-interest debts.

Disadvantages of refinancing a HELOC

Refinancing a HELOC could also:

• Cost too much upfront: Refinancing a HELOC requires paying new closing costs, appraisal fees, and sometimes application charges. These expenses might outweigh the savings from a lower interest rate, so calculate carefully.
• Extend repayment too far: Stretching your repayment term to reduce monthly payments means paying interest longer, increasing the total cost of your loan or line of credit.
• Limit future borrowing: Converting your HELOC into a home equity loan, or pulling out equity via a cash out refinance, lowers your home’s equity, potentially limiting future borrowing.
• Lower credit score: Applying to refinance can ding your credit score temporarily. A higher debt load from a new loan might also make it tougher to qualify for additional credit later.

HELOC refinance requirements

To refinance your HELOC, you’ll need to meet lender guidelines. These vary but typically include:

• Credit score: A minimum credit score of 620-680 is common, though Better accepts 640, making it accessible for more homeowners looking to adjust their line of credit.
• Debt-to-income (DTI) ratio: Lenders prefer a DTI below 50 percent, ensuring you can handle monthly payments on your HELOC and mortgage.
• Home equity: You’ll need enough equity. Better allows refinancing up to 90 percent of the home's value, maximizing your line of credit.

Meeting these essential HELOC requirements ensures you can repay your refinanced HELOC without straining your finances.

Four options to refinance a HELOC

Depending on your goals, here are four ways to refinance your home equity line:

1. Get a new HELOC: Replace your current HELOC with a fresh line of credit, potentially at a lower interest rate or better repayment terms. This suits homeowners who want to keep a HELOC open so they can keep drawing money from the credit line.
2. Pay it off with a home equity loan or with cash from a cash out refinance: Swap your HELOC for a home equity loan with a fixed interest rate and predictable monthly payments. This option simplifies budgeting and helps you repay your debt steadily.
3. Refinance your HELOC and mortgage together: Use a cash out refinance to merge your HELOC and mortgage into one loan. This can lower your interest rate and streamline monthly payments, though it may involve higher closing costs.
4. Convert to a fixed-rate product, like a home equity loan: A home equity loan (or HELOAN) can be a great option when locking your interest rate to stabilize monthly payments. This keeps the flexibility of a line of credit while eliminating rate fluctuations.

Alternatives to refinancing a HELOC

If refinancing your HELOC doesn’t fit, consider these alternatives:

• Modify your loan: Ask your lender to tweak your HELOC terms, perhaps by extending the repayment period. This avoids closing costs and keeps your existing line of credit.
• Get a personal loan: Use a personal loan to repay your HELOC, consolidating debt with a fixed interest rate and set monthly payments. Note that personal loans often have higher rates than a home equity line.
• Sell your home: If you're ready to move anyway, selling the home will generate funds to pay off the HELOC. In fact, if you sell, you'll have to pay off the HELOC.

Why refinance with Better?

Better stands out among lenders by making HELOC refinancing fast and user-friendly. Here’s why homeowners choose Better to refinance their home equity line:

• Speed: Check eligibility in minutes and get decisions within 24 hours—no lengthy waits to adjust your monthly payments.
• Flexibility: Access up to 90% of your home’s value, providing a generous line of credit to repay debts or fund projects.
• Transparency: No hidden closing costs or fees, ensuring you know exactly what you’ll repay.
• Digital ease: Manage your HELOC or home equity loan entirely online, from application to close.

For example, imagine you have a $50,000 HELOC with a variable interest rate of 9%, causing your monthly payments to jump unpredictably. With Better, you could refinance into a new home equity line at a competitive rate or get a home equity loan with fixed monthly payments, all while avoiding excessive closing costs.

Key considerations before you refinance

Before you refinance your HELOC, ask yourself:

• Do I need lower monthly payments? A longer repayment term or lower interest rate can ease cash flow.
• Can I handle closing costs? Factor these into your decision to ensure refinancing makes sense.
• How’s my credit score? A solid credit score unlocks better rates from lenders.
• What’s my equity level? More equity means a bigger line of credit or loan and potentially lower interest rates.

Understanding refinance points can also help you decide if paying upfront costs for a lower rate makes sense for your situation.

Take control of your home equity

Refinancing a HELOC empowers you to manage your line of credit, reduce your interest rate, and stabilize monthly payments. Whether you’re consolidating your mortgage and HELOC via a cash out refinance, switching to a home equity loan, or renewing your home equity line, the right strategy can enhance your financial freedom.

Better makes refinancing your HELOC seamless, offering rapid decisions and access to funds without the red tape of traditional lenders. Ready to repay your HELOC on your terms? Take the first step today.

....in as little as 3 minutes – no credit impact