Managing Debt

How to refinance a HELOC

Couple researching the best options when refinancing their home equity line of credit

Please note: Discover® Home Loans offers a home equity loans and mortgage refinance opportunities, but does not offer HELOCs.

If you took out a home equity line of credit (HELOC), you have a draw period and repayment period. During the draw period, you can draw on your line of credit and typically only pay interest on the money you borrow.

When your repayment period hits, however, you’ll no longer be able to draw on your line of credit and must pay down the amount you borrowed plus interest. While the draw period usually lasts up to 10 years, the repayment period is typically 15-20 years. 

Reasons to refinance a HELOC

Lower your monthly payments: It can be difficult to go from interest-only payments during the draw period to possibly much higher principal and interest payments during the repayment period. If you refinance your HELOC, you may be able to reduce your interest rate and monthly payments so that the repayment period becomes more affordable.
Get more money: Your home's value may have increased since you took out your HELOC. If this is the case, a HELOC refinance can allow you to get more money from your home equity. You can use the funds to remodel your home, pay for your child’s college, or even go on a vacation.
Convert to a fixed rate: If you have an adjustable-rate or variable-rate HELOC, you may be able to convert to a fixed-rate loan for more stable monthly payments. Most home equity loans and cash out refinances also feature fixed rates, and these are two ways to refinance your HELOC.
Adjust your repayment terms: Adjusting your HELOC’s repayment terms means changing how soon you will pay off your loan. You can shorten terms to potentially reduce HELOC interest charges and lower your interest rates, although your monthly payments will increase. Or you can lengthen your HELOC’s original terms, which may increase your interest charges but can allow you to pay less each month.

How do you refinance a HELOC?

After your draw period expires, your repayment period will begin, and your payments may jump higher at this time. So, as you approach the end of your draw period, you may want to consider refinancing your HELOC.

1. Loan modification

For a loan modification, you contact your lender and request an adjustment to your loan by extending its terms or reducing its interest rate so that you can better afford the monthly payments. If you are eligible to do this, it may be a good option if you’re worried you won’t be able to make your payments once your draw period is over and the repayment period begins.

Pros

Extend terms (repayment period) for HELOC.
Earn a lower interest rate or lock in a fixed rate.
Preventing your monthly payments from increasing frees up money for other debts.

Cons

Not always an option—your request may be denied.

2. Get a new HELOC

If you get a new HELOC to pay for the old one, you’ll be able to extend the draw period and defer the repayment period. A new HELOC may make sense if you feel confident that you’ll be able to make full payments once you enter the repayment period. It’s typically not a good option if you’re nearing retirement, won’t have a way to make your payments, or don’t want to pay more in interest.

Pros

Postpone the financial burden of making large payments during the repayment period.
Receive lower upfront costs than with a home equity loan.
Take more cash out if your equity allows

Cons

Potentially pay more in interest charges over the life of the loan.
Taking out more money may tempt you to overspend and increase your debt.

3. Get a home equity loan to pay HELOC

If you’d like to lock in a fixed monthly payment, you may want to consider refinancing your HELOC with a new home equity loan. Unlike a HELOC that works like a revolving line of credit, a home equity loan gives you access to a lump sum of money up front.

Pros

Get a fixed interest rate (hopefully lower than your current HELOC rate) that won’t change your monthly payment amount.
Alleviate the financial burden of making larger principal and interest payments than on a HELOC.

Cons

Closing costs and fees.

Family spending time together after parents refinanced a HELOC

Explore your options for a HELOC refinance to find one that works best for you.

4. Get a cash out refinance to pay off your HELOC

By refinancing your HELOC with a cash out refinance, you can get a single loan to pay off both your mortgage and your HELOC. You may be able to lock in a fixed interest rate and reduce the amount of your total monthly payments.

Pros

Can leave you with additional cash for almost any need, depending on your home’s value.

Cons

Longer terms extend the amount of time it takes to pay off your mortgage. 
Closing costs and fees.

5. Get a personal loan to pay off your HELOC

A personal loan can be used for just about anything, including paying off your HELOC. You can close out your HELOC with a personal loan so that you can secure a fixed rate and don’t have to deal with fluctuating interest rates.

Pros

Fixed interest rate that makes budgeting easier.
Easy to apply for.

Cons

May have prepayment penalties, origination fees, and late payment fees.
Higher interest rates than home equity loan options.

What are the requirements to refinance a HELOC?

Before approving you for a HELOC refinance, a lender may make sure you meet the following requirements.

Capacity to repay the new loan or line of credit

Your capacity to repay the new HELOC or loan will be based on your income and debts. Some lenders prefer to see that your total debt (including mortgage, loan payments, and any additional credit debt) should not be more than 43% of your gross income. Each lender has their own debt-to-income (DTI) guidelines, but these are good rules of thumb for you to assess your own ability to repay a new loan or line of credit.

Equity in your home

Your equity is the difference between the appraised value of your home and the amount you still owe on your mortgage (including any amounts of loans or lines of credit that have not yet been repaid). Your combined loan-to-value ratio (CLTV) represents the total balance of all outstanding mortgages secured by your home (including the prospective home equity loan) divided by your home’s value.

For example, if your home is currently worth $400,000 and your current mortgage balance plus the amount of the new home loan you are looking to borrow adds up to $320,000, then your CLTV would equal 80%:

$320,000 ÷ $400,000 = 0.8
0.8 × 100 = 80%

Many lenders will cap your borrowing at 80% of your CLTV. Discover Home Loans will let you borrow up to a CLTV of 90%.

Credit history & credit score

If you have a credit history of missed payments or your credit score is low, a lender may be less likely to approve you for a new loan or line of credit to refinance your HELOC. Improving your history of on-time payments may have a positive impact on you credit score and increase your chances for a loan approval. 

Documents required for refinancing a HELOC

Here is a list of documents you may need to provide your lender if you want to refinance your HELOC:

Details of property: Your lender will need to know your property’s address to find its assessed value since it will be used as collateral.
Identification documents: A government-issued photo ID like a driver’s license or passport from you and your spouse or co-applicant will be required.
Employment and income details: In addition to the name and phone number of your current employers, the lender may ask you to provide your most recent pay stubs and two years of W2s and federal tax returns. If you’re self-employed, lenders may need your personal and business tax returns.
Details of existing debts: If you have any existing debts like a mortgage, car loans, student loans, or credit card debts, you may have to disclose details related to each account.
Property tax and HOA: Receipts of the payments you’ve made on your homeowners insurance policy, property taxes, and homeowners association fees may also be required.

Closing thoughts: Refinance HELOC balances

Refinancing a home equity line of credit may be a smart move for homeowners who have taken out this type of loan. By taking advantage of lower interest rates or adjusting the repayment terms, you may be able to manage your financial situation more efficiently. Refinancing may give you an opportunity to lower your monthly payments, switch to a fixed interest rate, or even consolidate multiple loans to simplify your finances.

Remember that when you’re considering a HELOC refinance, you have several options that you may be eligible for. You may decide to refinance with your existing lender, or shop around for a new one. By weighing the benefits and risks of the available options, you can prepare to decide what will work best for you.