Refinancing replaces your current mortgage with a new one. That’s something you might consider if you’d like to get a lower interest rate or different repayment terms. Having an open home equity line of credit (HELOC) can add a wrinkle to the refinancing process.
Here’s some comforting news for those who are wondering, If I refi my home, can I keep my HELOC? Yes, if your lender agrees to subordinate the line of credit. What, exactly, does that mean? Read on for what you need to know about refinancing with HELOC debt (or refinancing with an open line of credit).
Key Points
• When refinancing, a subordination agreement makes it possible for a homeowner to refinance with a HELOC.
• Subordination maintains the HELOC in a junior lien position, keeping it open.
• Retaining a HELOC may lead to a higher interest rate and monthly payment on the new mortgage.
• Advantages include flexible credit access and avoiding reapplication; disadvantages involve higher interest rates and increased debt risk.
• Steps to navigate refinancing with a HELOC include financial assessment, using a refinance calculator, and securing a subordination agreement.
Understanding Refinancing and HELOCs
Refinancing replaces your existing mortgage with a new home loan. You may refinance with your current lender or a different one. It’s a fairly straightforward process if you have just one mortgage to refinance. You compare mortgage rates from different lenders, go through the mortgage preapproval process, and apply for a loan. The lender appraises your home’s value and checks your credit to determine whether to approve you.
Do you have to pay off a HELOC if you refinance? Not necessarily. Whether you get to keep your HELOC after refinancing depends largely on the lender.
If you need an in-depth HELOC definition or want to better understand how this type of credit line works, read our detailed HELOC loan guide.
Impact of Refinancing on an Existing HELOC
Refinancing with HELOC debt opens up some different possibilities for how your line of credit is handled. It helps to understand what could happen before applying for a mortgage refinance loan.
Subordination of the HELOC
Subordination refers to the way debts are ranked in order of priority for payoff, from highest to lowest.1 When you get a loan to buy a home, the home secures the property. This creates a lien, which allows the lender to make a legal claim to the property if you don’t repay what you owe. This mortgage is a first or senior lien. A HELOC, on the other hand, is a secondary or junior lien.2,3
Here’s what that means in simple terms. If you refinance your home, your first mortgage takes precedence for payoff. Once that loan is paid off with the proceeds from the new loan, your HELOC moves into the first loan position.
If you were to sell the home or fall into foreclosure, the HELOC would take priority for repayment which poses a risk to the lender who provides your new mortgage. If there isn’t enough money from the sale or auction of the home to cover the refinanced mortgage debt, the lender could take a financial hit.
Paying Off the HELOC
You could pay off your HELOC in full prior to refinancing, either with cash on hand or money from the refinance loan. Once you pay your line of credit off, your lender may close the account. If you’d still like to have access to a credit line for emergencies or other purposes, you’d need to apply for a new HELOC.
Whether that makes sense can hinge on how much equity you have in the home and what you’ll pay for a new HELOC in interest and fees. If you’re refinancing your first mortgage because rates dropped, for instance, you may be able to qualify for a low rate on a new home equity line of credit.
Closing the HELOC
HELOC rules prevent lenders from closing your account as long as you continue making payments. So you wouldn’t be able to shut your line of credit down without paying the balance off first.4
If you’re refinancing your HELOC debt into the new mortgage (borrowing enough to cover what you owe on your home plus what you owe on your HELOC), the new loan would pay off the balance on your line of credit and close the account. Once your HELOC is closed you wouldn’t be able to make additional withdrawals from your credit line.
Recommended: How Much Does It Cost to Refinance a Mortgage?
Options to Retain Your HELOC During Refinancing
Keeping your HELOC when refinancing may take a little effort on your part. Here’s how to navigate this part of the refinance process.
Requesting Subordination from Your HELOC Lender
A subordination agreement is a legally binding agreement specifying that your HELOC will take a second lien position when you refinance. If you have a HELOC with one lender and plan to refinance with another, all the lenders involved in the transaction would need to agree to subordination.
You can reach out to your lender directly to ask if subordination is an option. If so, you’ll need to complete whatever paperwork the lenders require. A lender may have a standard subordination form you’ll need to fill out.5
Subordination allows you to keep your HELOC open after refinancing. You may, however, have to pay a fee to the lender to get them to agree to subordination of your line of credit.
Refinancing with the Same Lender
If you plan to refinance with the same lender that you have your HELOC with, it may be easier to have your subordination request granted. Keep in mind that:
• New draws from your HELOC may be temporarily prohibited until refinancing is complete
• Your new loan may come with a higher interest rate if the lender is concerned about your risk profile
• A higher rate on your refinance loan could result in a higher monthly payment
If you’re considering this option, talk to your lender about how refinancing with a HELOC would work and the ways it might impact your new loan.
Refinancing Without Paying Off the HELOC
Subordination allows you to refinance your first mortgage without having to pay off your HELOC or close your HELOC account. The main consideration is whether you’ll be able to afford the monthly payments on your HELOC and your new mortgage payment.
Running the numbers is relatively easy if both your refinance loan and your HELOC have a fixed rate. It’s a little more challenging if you have a variable-rate HELOC.
With a variable-rate HELOC, your rate is tied to an index or benchmark rate, like the prime rate. If the benchmark rate goes up or down, your rate — and your payments — can move the same way.6
Pros and Cons of Keeping Your HELOC When Refinancing
Keeping your HELOC open when refinancing has pros and cons. Weighing both sides can help you decide if it’s right for you.
Advantages
Here are some of the benefits to keeping your line of credit open when you refinance.
• HELOCs offer flexible access to credit when you need it, whether it’s for an emergency or a large purchase.
• You pay interest only on the portion of the credit line you use, so you can control your costs to a degree.
• Keeping your HELOC open means you don’t have to apply for a new one (and get another ding on your credit).
Disadvantages
When is keeping your HELOC open after a refi not the best move? Here are the downsides.
• Subordinating your HELOC could mean paying a higher interest rate on your refinance loan, which can add to your cost of borrowing.
• You risk losing the home if your refinance and HELOC payments become unaffordable.
• An open HELOC could be a temptation to spend unnecessarily, leading to more debt and more interest that you’ll have to repay.
Recommended: How Often Can You Refinance Your Home?
Steps to Refinance Your Home While Retaining Your HELOC
Refinancing with a HELOC takes some planning and it helps to understand what you can expect. Here’s an overview of how refinancing with a HELOC typically works.
Assess Your Financial Situation
Your credit and finances carry weight in refinancing, as lenders want to see that you have a good credit history and reliable income. Before you start shopping for a lender, take time to:
• Check your credit reports and scores
• Review your monthly budget and income, including how much of your pay currently goes to debt repayment
• Consider the long-term and how your income or expenses might change over time
• Use a refinance calculator to estimate the monthly payments on a new loan
If you’re still in the draw period of your HELOC, you might be making minimum or interest-only payments. Once repayment begins, your principal plus interest payments could be much higher. Thinking ahead can increase the odds of being able to manage your HELOC and refinance loan payments.
Communicate with Both Lenders
Communication can make refinancing with a HELOC a much smoother process. If you plan to refinance with a lender that’s different from the one you have your HELOC with, you’ll need to talk to both of them about subordination.
This is an opportunity to explain why you want to keep your HELOC open and ask questions about the subordination process. Ultimately, it’s the HELOC lender that must agree to remain in the second lien position. Be prepared to explain the terms of the refinance loan to the HELOC lender and the HELOC terms to your refinance lender.
Understand Subordination Agreements
Subordination agreements may not be lengthy; they just need to include the key details of the transaction and the signatures of the parties involved. However, it’s still important to review the agreement carefully so you know what you’re agreeing to.
The agreement should include:
• Names of the subordinating and refinance lenders
• Your name
• The date each mortgage was taken out
• An acknowledgment by the HELOC lender that the HELOC will stay in the second lien position
If you’re having trouble decoding your subordination agreement, don’t hesitate to ask the lender to explain it in more detail.
Prepare Necessary Documentation
Your lender should handle preparation of the subordination agreement. You may need to provide the HELOC lender with documentation for the refinance loan, showing how much you plan to borrow.
For the refinance itself, your lender may ask for:
• Recent pay stubs
• Bank and/or investment account statements
• Tax returns
• A profit and loss statement if you’re self-employed
You’ll need to go through a hard credit check and get an appraisal of the home. The refinance lender may schedule an in-person, drive-by, or virtual appraisal. Once approved, you’ll just need to review and sign the closing paperwork and pay closing costs. Those are the basic steps for how to refinance a home loan, with or without a HELOC.
The Takeaway
Refinancing with a HELOC makes things a little more complicated, but it’s possible to keep your line of credit through a process called subordination. You’ll have to communicate both with your new mortgage company as well as with the lender who gave you the HELOC. Alternatively, it may be possible to pay off your HELOC with your new mortgage, or pay it off with funds from other sources before you undertake a refi.
SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.
FAQ
Is it possible to refinance both my primary mortgage and HELOC simultaneously?
It’s possible to refinance a primary mortgage and HELOC at the same time using a cash-out refinance. You’d get a new mortgage loan and pull your equity out in cash, then use that money to pay off the HELOC. You’d then have one mortgage payment to make going forward.
Will my HELOC lender agree to subordinate their lien during refinancing?
The answer to this question depends on the lender. Subordination moves the HELOC into a junior lien position, but that’s where HELOCs ordinarily go when you have a primary mortgage. Talking to your lender can give you an idea of whether subordination is something they’ll agree to.
How does the combined loan-to-value ratio impact refinancing with an existing HELOC?
Combined loan-to-value (CLTV) measures all of the outstanding mortgage debt you have against your home’s value. If your CLTV ratio is too high, that could affect your ability to qualify for a refinance loan. The lender may limit the amount you can borrow or deny you altogether.
Are there additional costs associated with subordinating a HELOC during refinancing?
Lenders may assess a fee to enter into a subordination agreement. The fee may be lower or higher, depending on the lender. Talking to your HELOC lender is the best way to find out whether subordination is allowed and if so, what fees you might pay.
Can I draw from my HELOC during the refinancing process?
Your lender may limit new draws while you’re in the middle of refinancing. Once the refinance is complete and the subordination agreement has been signed, you should be able to resume withdrawing from your credit line.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/ljubaphoto
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