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Home equity lines of credit (HELOCs) typically begin with a 10-year draw period, during which you can withdraw money and make interest-only payments. Once the draw period expires, you enter a repayment period, often for 20 years, when you must repay both the principal and interest with a larger monthly payment. HELOCs also tend to have variable interest rates, which can make your payment amounts less predictable.
If you're finding it difficult to manage your HELOC payments, you might consider refinancing your HELOC. You can refinance a HELOC through a number of possible options, and the best choice will likely depend on your unique financial circumstances.
Can You Refinance a HELOC?
Yes, you can refinance your HELOC, and there are multiple ways to do it. For example, you may refinance your current HELOC or pay it off using another loan product, such as a home equity loan or personal loan. Refinancing your HELOC may help you lower your interest rate and monthly payments to make your repayment period more affordable.
Refinancing your HELOC can also help you accomplish other financial goals. For example, using a home equity loan to pay off your HELOC can free up cash to pay off high-interest debts. Before proceeding, you'll want to consider the benefits and downsides of each refinancing option.
4 Ways to Refinance a HELOC
Refinancing your HELOC may consolidate your debt, lower your interest rate or offer more favorable repayment terms. Here are several methods to consider for refinancing your HELOC:
1. Modify Your HELOC
Sometimes, the most effective solutions are the simplest ones. If you merely need to lower your monthly payment, consider contacting your lender and requesting an adjustment to your current HELOC.
A loan modification, if approved, can make your payments more manageable by extending your repayment term, lowering your interest rate or possibly reducing your principal balance. While acceptance isn't guaranteed, many banks are willing to work with borrowers facing payment challenges, so it doesn't hurt to ask.
2. Open a New HELOC
One way to get more favorable HELOC terms is to take out a new HELOC to pay off the old one. By doing so, you'll reset your draw period while postponing your repayment period. In this case, this strategy's biggest benefit and drawback are the same: A new HELOC will extend your draw period and postpone your repayment period.
On the one hand, a new HELOC may be a worthwhile option if you're certain you can afford the payments when you enter the repayment period. But think twice about this risky option if you anticipate your income staying the same. For instance, if you plan to retire and live on a fixed income soon, that may not be the best time to enter into the repayment period.
Keep in mind, paying off your HELOC with a new one might result in paying more interest over time, and a new HELOC could tempt you to accumulate more debt.
3. Get a Home Equity Loan to Pay Off Your HELOC
Like a HELOC, a home equity loan uses the equity in your home as collateral but works differently. Instead of making periodic withdrawals as needed, like with a HELOC, a home equity loan provides you a lump sum upfront. You must repay the home equity loan over a fixed term, typically five to 30 years. The loan usually has a fixed interest rate with predictable monthly payments, so you can budget to make consistent payments and pay off your loan, and you won't risk payment amounts rising if interest rates increase.
However, this strategy might not considerably reduce your monthly payments and could increase your total interest charges over the life of the loan. Remember, you'll also pay closing costs from 2% to 5% of the loan amount.
4. Pay Off Your HELOC With a Cash-Out Refinance
Another option to refinance your HELOC is to utilize a cash-out refinance. In this scenario, you could replace your original mortgage with a new one for a larger loan amount by using some of the equity you have in your home. You can then use the extra cash to pay off your current mortgage and your HELOC. Ideally, your new loan will come with lower monthly payments and a lower, fixed interest rate.
However, this strategy is not without its risks. For starters, you'll lose more of your equity and risk ending up underwater on your home loan if housing prices drop. If interest rates have increased since you took out your current mortgage, you could lose money and pay more each month with a new, higher-rate mortgage. Additionally, unless you refinance to a shorter-term loan, you're extending your timeframe for paying off your mortgage. Finally, you'll have to pay closing costs, typically ranging from 2% to 6% of your new loan amount.
How to Qualify for Refinancing a HELOC
Refinancing your HELOC could add a little breathing room to your budget and help you pay down your debt more effectively, but you must qualify with your lender. Eligibility criteria vary by lender, but most weigh the following considerations:
- Home equity: You must have sufficient home equity—the difference between your home's value and your mortgage balance—to refinance your HELOC using the options above. Most lenders cap the amount you can borrow at 80% of your combined loan-to-value ratio (CLTV). This ratio represents the total amount of all the loans against your home, divided by its value. That means if your home is worth $400,000, you might be able to borrow up to $320,000 ($320,000 / $400,000 = 0.80 or 80%).
- Debt-to-income ratio: Lenders typically gauge your ability to repay a HELOC or other loan options by reviewing your debt-to-income ratio (DTI). This ratio measures all your monthly debt obligations against your gross monthly income. Generally, lenders prefer your DTI to be 43% or less, but the lower, the better.
- Credit report and score: Regardless of the refinancing option you choose, your lender will likely run your credit to see how well you manage your credit. Minimum credit score requirements can vary depending on the lender, loan product and other factors, but as a general rule, aim for a credit score of 680 or higher. Some lenders may approve your loan with a lower credit score but expect to pay a higher interest rate in that case.
Alternatives to Refinancing
Refinancing isn't the only solution for managing a HELOC. Consider the following alternatives to address your HELOC debt.
- Convert your variable-rate HELOC. If your HELOC has a variable rate, consider asking your lender to convert a portion or all of your balance to a fixed-rate HELOC. Doing so could lock in your interest rate, making it easier to repay your debt.
- Pay off your HELOC with a personal loan. If you'd rather not use your home as collateral with a new home equity loan, HELOC or refinance, a personal loan might be your best bet. Most personal loans are unsecured, so you won't have to touch your home's equity to qualify. Consequently, personal loan interest rates are often higher than HELOCs because lenders tend to view them as riskier. Remember, you may incur an origination fee from 1% to 6% of the loan amount.
- Consider a HUD assistance program. The U.S. Department of Housing and Urban Development (HUD) offers several programs to assist homeowners at risk of foreclosure or who face challenges paying their mortgage payments. Contact a HUD-partnered housing counseling agency to explore your options.
FAQs
You can refinance your HELOC as often as you like, provided you meet your lender's qualifications each time you apply. Whether or not you should refinance multiple times is another question altogether and will depend on numerous factors, such as the total amount of interest you'll pay, the amount of debt you'll incur and, ultimately, whether refinancing leaves you in a stronger financial position in the long run.
Repayment of HELOCs is typically divided into two periods. The loan begins with a draw period, usually five to 10 years, in which you can withdraw when needed for as much as you need up to your credit limit. You'll make interest-only payments during this time. Following the draw period is the repayment period, typically 20 years, when you must repay your principal balance and interest, usually with variable interest rates.
Some lenders require a waiting period after you close on your home before you can apply for a HELOC. You can get a HELOC 30 to 45 days after purchasing your home, as long as you meet your lender's equity, income, credit and other qualifications.
The Bottom Line
If you're struggling to make your HELOC payments, it's wise to be proactive and take action as necessary to avoid foreclosing on your loan. Contact your lender and explain your situation, especially if you can't repay your HELOC due to a temporary financial hardship. Many lenders offer hardship programs or may pause your payments temporarily until you can get back on your feet.
While you're shaping up your finances, it's also a good idea to ensure your credit health is strong. Consider getting free credit monitoring from Experian to understand what factors are impacting your credit and to receive real-time alerts about changes to your credit score.