If the terms of your home equity line of credit (HELOC) no longer feel like a good fit, you may be wondering if you can refinance your HELOC with another bank.
The answer is yes, you can. There are several HELOC refinancing options available. And depending on your reasons for refinancing, and the terms other lenders are offering, you might be able to benefit from switching to a different lender.
Read on for a look at what it can take to refinance a HELOC, some pros and cons, and whether it might make sense for you.
Key Points
• Refinancing a HELOC can lead to a lower interest rate, extended draw period, and reduced monthly payments.
• Potential drawbacks include higher interest rates, closing costs, and a temporary decrease in credit score.
• Eligibility for refinancing requires at least 15% to 20% home equity, among other factors.
• Options for refinancing include a new HELOC, a home equity loan, a cash-out refinance, or modifying the current HELOC.
• The refinancing process involves reviewing current terms, comparing offers, providing documentation, and applying for a new loan.
HELOC Refinancing Explained
A HELOC is a revolving line of credit that usually comes with a variable interest rate — which can make it seem very much like using a credit card. You can tap into your credit line at any time (up to a preapproved limit). And you can use the money for just about anything you want.
Unlike a credit card, however, a HELOC is secured by the equity in your home. Which means the credit limit for a HELOC will likely be higher than a credit card, and the interest rate will likely be lower. But if you default on your payments, you could be putting your home at risk of foreclosure.
Another significant difference between HELOCs and credit cards is that the life of a HELOC is divided into two phases:
• With a HELOC, you can only use the money from your credit line for a fixed period of time (usually 5 or 10 years) called the “draw period.” During this time, you can make payments toward your principal and interest, if you like. But typically, HELOC borrowers are only required to make interest payments during the draw period.
• When the draw period ends, the “repayment period” begins. During this phase, which generally lasts 10 to 20 years, the focus turns to paying back the principal, along with any interest that’s due.
This is where the option to refinance a HELOC might make sense for some borrowers. Depending on how large the account balance has grown over time, your monthly payments could be substantially higher during the repayment period than they were during the draw period — especially if interest rates have gone up over the years. If you can transfer your HELOC to another bank with more competitive terms (a lower interest rate, for example, or a longer loan length), it could help bring those payments down. You also could refinance to a new HELOC so you can continue borrowing against your equity with another draw period.
Eligibility for HELOC Refinancing
When you refinance a HELOC, you’re basically taking out a whole new line of credit or a new loan to replace your current account. And the eligibility requirements lenders want you to meet may be different from those of your original HELOC. With a refinance, you can expect lenders to look at several factors, including:
• Home equity: Home equity is the value of your home minus the amount you still owe, and to qualify for a HELOC, you typically must have at least 15% to 20% equity in your home. (A home equity loan calculator can help you estimate how much you might be able to borrow.)
• Debt-to-income (DTI) ratio: Lenders look at your DTI ratio (all monthly debt payments / gross monthly income = DTI) to determine how much of your income goes toward paying your monthly debts. Generally, lenders like to see a DTI ratio that’s no higher than 43% to 50%, but the lower the better.
• Loan-to-value (LTV) ratio: The amount you’re allowed to borrow can also be affected by your LTV ratio (your mortgage balance / your home’s current value). Having a lower LTV can improve your chances of meeting refinance requirements. Lenders also like to see a low combined loan to value (CLTV) ratio (that’s all the secured loans on your home / the value of your home) to be sure you aren’t taking on too much debt.
• Credit standing: Having a good credit score and solid credit history can help you qualify for financing and get a better interest rate.
Types of HELOC Refinancing Options
If you’re thinking about refinancing your HELOC, you may have a few different options to consider, including:
Replacing Your Current HELOC with a New HELOC
Refinancing to a new HELOC can allow you to reset your draw period (giving you more time to keep borrowing) and postpone your repayment period. You also may qualify for more favorable terms — a fixed and/or lower interest rate, for example, or a longer loan term with lower monthly payments. It’s important to keep in mind, though, that if you refinance and you don’t pay down your principal, you could end up paying more interest over time. And if you sell your home, you’ll likely have to pay off your HELOC as part of that transaction. You can use a HELOC monthly payment calculator to see how different interest rates will affect your monthly payments.
Paying Off Your HELOC with a Home Equity Loan
There are different types of home equity loans. A basic home equity loan is similar to a HELOC in that it’s secured with the equity in your home. But unlike a HELOC, a home equity loan is paid out as a lump sum and usually has a fixed interest rate. This can make payments more predictable, and easier to plan for. But again, you could end up paying more interest over time than you would with the original HELOC. And if you sell your home, you may need to pay off the home equity loan. These are all considerations as you weigh a new HELOC vs. a home equity loan.
Using a Cash-Out Refinance
With a cash-out refinance, you would replace your original mortgage with a new, larger mortgage, and use the money that’s left over to pay off your HELOC. If you can get a fixed interest rate that’s lower than what you’ve been paying, this strategy might make sense, especially if you can also refinance to a mortgage with a shorter term. And as an extra bonus, you’ll have the convenience of combining two payments into one. But better terms aren’t guaranteed, so it’s a good idea to check out what various lenders are offering.
Modifying Your HELOC with Your Current Lender
If your current lender will work with you to lower your monthly HELOC payments, that may be the most convenient option. If you have a good relationship, you can try asking about extending your repayment term, lowering your interest rate, moving to a fixed rate, or even reducing your principal. Even if you get a positive response, though, you may want to take some time to look at what other lenders are offering and what best suits your needs and goals.
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The HELOC Refinancing Process
The process for refinancing your HELOC is pretty much the same whether you choose a new HELOC, a home equity loan, or some other option. Here are some of the basic steps:
Getting Reacquainted with Your Current HELOC
If it’s been a while since you looked at the terms of your HELOC, take a moment to get reacquainted with the important details — including your current balance, your repayment terms, any fees you might owe, the current interest rate, and what you could end up paying in the future if rates go up.
Comparing Lenders and Offers
Once you’ve reviewed your current HELOC, you can do some comparison shopping to see what other lenders might offer you. Look at interest rates, fees, and other loan terms. And if you can, read reviews to get a feel for what it might be like to work with a particular lender. Keep both your short- and long-term goals in mind as you evaluate various refinancing options.
Applying for Refinancing
Be prepared to provide current mortgage and bank statements, proof of income and employment, a home appraisal, and any other documentation your lender asks for. You can also expect your lender to run a credit check.
Keep in mind that you can only refinance your HELOC if you have adequate equity in your home. If you don’t have at least 15% or 20% in equity, based on the home’s current fair market value, you may not qualify for refinancing.
Costs Associated with HELOC Refinancing
No matter which method you might choose to refinance your HELOC, you can expect to pay closing costs on the new loan. These can include an appraisal fee, loan origination fee, application fee, credit reporting fee, attorney fee, and more. Closing costs vary depending on the type of loan, the loan amount, and the lender. Though closing costs for some loans can be as high as 2% to 5% of the loan amount, with a HELOC, you may be able to pay as little as 1%.
Pros and Cons of Refinancing Your HELOC with Another Bank
If you’re thinking about refinancing your HELOC with a different lender, there are a few pros and cons you may want to consider.
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Pros:
• You may be able to qualify for a lower interest rate with a new lender. (Especially if your credit has improved or rates have dropped since you took out your original HELOC.)
• With a new HELOC, you could restart the draw period and continue borrowing money when you need it.
• You also may be able to extend your repayment term and potentially lower your monthly payments.
• If you’re unhappy with your current lender, refinancing could allow you to break up and move on.
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Cons:
• If interest rates have gone up since you opened your original HELOC, you may have to pay more for your loan.
• You can expect to pay some closing costs when you open a new HELOC.
• You’ll have to complete some paperwork, and you may have to get a new appraisal.
• Applying for a new HELOC could temporarily ding your credit.
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The Takeaway
If you think you may be able to qualify for a more affordable monthly payment by refinancing into a new HELOC or home equity loan, or by doing a cash-out refinance with your first mortgage, it can make sense to check out the options with other lenders when you are wondering if you can refinance a HELOC with a different bank. It’s easy to hop online and compare what lenders are offering. And that can help you decide if refinancing would help you meet your financial goals.
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
How soon can I refinance my HELOC after opening it?
If you’re hoping to avoid high monthly payments or you want to extend your draw period, it can make sense to refinance your HELOC before you enter the repayment period. But it’s a good idea to review your HELOC agreement to determine if your lender assesses a penalty for closing your HELOC out early.
Will refinancing my HELOC affect my credit score?
Refinancing your HELOC could temporarily affect your credit score. But you can minimize the impact by making your HELOC and other payments on time and by not applying for any other credit accounts for a while.
Can I refinance a HELOC on an investment property?
You may be able to refinance a HELOC on an investment property, but in general, HELOCs are not as common for investment properties as they are for primary residences. Fewer lenders offer them, and the eligibility requirements may be more strict.
Photo credit: iStock/Inside Creative House
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