Should You Consider Refinancing Your HELOC? Here’s What You Need To Know

Taking out a home equity line of credit (HELOC) can be a great way to access funds for home renovations, debt consolidation, or other major expenses. HELOCs typically come with a 10-year draw period where you can access the funds as needed, followed by a 10-20 year repayment period where you must start making principal and interest payments.

While HELOCs offer flexibility and low interest rates during the draw period, the repayment period can bring payment shock as you transition to fully amortized payments. This is especially true if interest rates have risen significantly since you first opened your HELOC.

So what can you do if you have an existing HELOC and are worried about facing unaffordable payments down the road? Refinancing your HELOC into a new loan may allow you to reduce your interest rate or extend your repayment term to make monthly payments more manageable

Here’s what to know about refinancing a HELOC, including common refinancing options, eligibility requirements, and pros and cons of each approach

When Does Refinancing a HELOC Make Sense?

Refinancing a HELOC into a new loan generally makes the most sense if:

• Interest rates have dropped significantly since you opened your HELOC, allowing you to reduce your rate
• You want to consolidate HELOC debt into your primary mortgage to simplify payments
• You are nearing the end of your draw period and want to extend your repayment term to reduce monthly payments
• Your credit score has improved, making you eligible for better loan terms
• You took out your HELOC when rates were low and now want to lock in a fixed interest rate

On the other hand, refinancing may not make sense if you would incur high closing costs relative to the amount of interest savings, or if you plan to pay off your HELOC soon anyway. It’s best to run the numbers with a mortgage broker to see if refinancing achieves your goals cost-effectively.

What Are the Requirements to Refinance a HELOC?

To qualify for a HELOC refinance. you’ll generally need

• A credit score of at least 620, with scores of 740+ ideal for the best terms
• A debt-to-income ratio below 50%
• Sufficient equity in your home (at least 15-20% loan-to-value ratio)
• Stable income and employment history

As when taking out your original HELOC, the lender will review your credit report, income, assets, debts, and home value to ensure you meet their underwriting criteria.

You may need to provide documents such as bank statements, tax returns, pay stubs, and a home appraisal. Closing costs for a HELOC refinance, including appraisal fee, typically range from 2-5% of the loan amount.

What Are Your HELOC Refinancing Options?

You have several options when refinancing an existing HELOC:

1. Refinance into a new HELOC

You can open a new HELOC that gives you another 10-year draw period and interest-only payments. This delays having to pay down principal for another decade.

Pros: Provides short-term payment relief, flexibility to access more funds as needed

Cons: Accumulates more interest over time, balances continue growing

2. Refinance into a home equity loan

A home equity loan provides fixed payments and a longer repayment term of up to 30 years.

Pros: Fixed rate, predictable payments, longer time to repay

Cons: Higher interest rate than HELOC, pays more interest over loan life

3. Refinance into a cash-out mortgage

You can roll your HELOC balance into a new first mortgage via a cash-out refinance.

Pros: Lower fixed rate, consolidate into one monthly payment

Cons: Higher closing costs than HELOC refi, rates rise as you tap more equity

4. Modify your existing HELOC

If you don’t qualify to refinance, ask your lender about modifying your current HELOC by extending the term or reducing the interest rate.

Pros: May make loan affordable without refinancing; quick process

Cons: Not a guarantee; lender not obligated to modify

Analyze the terms, rates, fees, and your goals to decide which option makes the most financial sense for your situation.

What Are the Pros and Cons of Refinancing a HELOC?

As with any refinance, you’ll need to run the numbers to see if the costs of refinancing justify the potential interest savings and other benefits over the long run.

Shop multiple lenders to find the best available rates and terms for your situation. A reputable lender like [company name] can assess your options and illustrate the costs and savings to help determine if pursuing a HELOC refi makes solid financial sense.

What Interest Rate Can I Expect When Refinancing My HELOC?

The interest rate you can qualify for when refinancing your HELOC depends on several factors:

• Your credit score and history – scores above 740 fetch the lowest rates
• Your debt-to-income ratio – below 36% is ideal
• Your home equity – more equity means better rate offers
• Overall mortgage rates – compare today’s average rates on Bankrate
• Type of refinance loan – HELOCs have lower rates than other products

In today’s market, here are some general guidelines for HELOC refinancing rates based on your credit profile:

• Excellent credit (740+ score): 3.5% – 5%
• Good credit (700-739 score): 5% – 7%
• Fair/Average credit (640-699 score): 7% – 10%

The best way to determine the rate you can qualify for is to apply with multiple lenders and compare options. Focus first on reputable lenders like [company name] that offer HELOC refinancing.

How Can I Get the Best HELOC Refinancing Rate?

Here are some tips to get the lowest rate when refinancing your HELOC:

• Shop multiple lenders – compare offers from banks, credit unions, online lenders
• Check your credit – improve your score before applying if below 740
• Lower your debt – pay down balances to reduce your DTI ratio
• Choose a shorter term – shorter terms (e.g. 10 years) have lower rates
• Put down a larger down payment – higher equity means better rates
• Consider loan points – pay points to buy down your interest rate
• Improve your home – home improvements may increase appraisal value
• Ask about discounts – see if you qualify for any rate discounts

Even a small reduction in your HELOC refinancing interest rate can save thousands over the loan repayment period. Spending time upfront finding the best possible rate for your situation is well worth the effort.

What Closing Costs Are Associated With Refinancing a HELOC?

When refinancing a HELOC, expect to pay closing costs typically ranging from 2% to 5% of your loan amount. Common fees include:

• Appraisal fee – $300 to $500 for home valuation
• Application fee – $50 to $100
• Origination fee – 1% to 2% of loan amount
• Points – 1 point equals 1% of loan amount
• Attorney fees – $300 to $1,500
• Recording fees – $50 to $200
• Title fees – $500 to $1,500
• Taxes and insurance – 1 to 2 months required upfront

You may be able to finance closing costs into your new loan amount, but this increases the principal and interest you’ll repay over the life of the loan.

Shopping among multiple lenders can help you find options to lower or waive certain fees. Online lenders sometimes offer lower overall closing costs.

How Long Does it Take to Refinance a HELOC?

The timeline to refinance a HELOC can range from 30 to 60 days in normal market conditions. Here are typical steps and timeframes:

• Get pre-approved – 1 week
• Submit full application – 24 hours
• Processing and underwriting – 1-2 weeks
• Home appraisal – 1 week
• Final approval – 1 week
• Closing disclosure – 3 days before closing
• Loan closing & funding – 1-2 weeks

Having an organized application, getting documents in quickly, and promptly responding to any requests can help streamline the process