The 11 Best Ways To Refinance a HELOC
If you’ve built up your home’s equity, you can potentially borrow money for projects like renovations, expansions, debt repayment or even other large purchases.
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One of the best ways to access these funds is through a home equity loan of credit (HELOC), often offering better interest rates than other types of loans. If you’ve taken out a HELOC and realize you can get better rates or want to lower your monthly payments, you should refinance it.
Read on as experts explain how to refinance a HELOC for best results.
Have a Plan
It’s important to be clear about why you want to refinance, according to Warner Quiroga, a real estate investor and president and CEO of Prestige Home Buyers.
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Whether you’re looking to catch a lower interest rate, increase your line of credit, or consolidate debt, he said, “Knowing your goals will help you tailor your refinance plan.”
Consider Your Credit Score
Your credit score also plays a big role in the terms you’ll qualify for.
“Aim to boost your score if it’s not looking too hot, and shop around for lenders who offer the best deals based on your creditworthiness,” Quiroga said.
Evaluate Your Current Situation
Before you refinance your HELOC, assess your current HELOC terms, the outstanding balance and the interest rate, according to Bill Ryze, a certified chartered financial consultant (ChFC) advisor at Fiona.
“Check out whether your draw period is ending or if you’ve accumulated a substantial balance. These factors are crucial and will help you decide the best time to refinance,” Ryze said.
Explore Fixed-Rate Options
“If you’re worried about interest rates creeping up in the future, switching to a fixed-rate HELOC might give you some peace of mind,” Quiroga said. “Sure, it might be a tad higher than a variable rate initially, but it can save you from any nasty surprises down the road.”
Fixed-rate scenarios are “ideal in a rising interest rate scenario,” Ryze agreed.
You could also convert your HELOC into a fixed-rate home equity loan, as one option, Ryze explained. “It provides stability by locking a consistent interest rate and predictable monthly installments. Besides, your liability reduces over time.”
You might even be able to refinance to a fixed-rate HELOC, which Ryze said is helpful when you prefer the flexibility of a line of credit but want a stable interest rate.
Research Lenders and Gather Documentation
Be sure you compare multiple lenders and research different options, Ryze suggested because HELOC lenders differ from mortgage lenders.
Then, prepare your documentation, including income statements, credit history, and property details.
Get Prequalified Quotes
Look for and obtain prequalified quotes from multiple top lenders, Ryze urged. “It allows you to compare interest rates, fees, and credit terms to help zero in on the most favorable deal.”
Quiroga agreed that you should not settle for the first offer that comes through, either.
Factor in Fees
Refinancing isn’t free, however, Quiroga said, so factor in fees.
“Be prepared to shell out for things like appraisal fees, closing costs, and maybe even prepayment penalties,” Ryze said.
He urged you to crunch the numbers to ensure savings outweigh the costs in the long haul. You’ll also need to prepare for a credit check.
Reduce Your Payments
A good reason to refinance a HELOC is to unlock substantial cost savings, according to Abid Salahi, cofounder of Finly Wealth.
He pointed out that a recent study by Freddie Mac showed homeowners who refinanced their HELOCs in 2022 saved an average of $268 monthly on their payments.
“This staggering figure underscores the potential benefits of this strategic move,” Salahi said.
Get a Lower Interest Rate
One of the most compelling reasons to refinance a HELOC is to capitalize on lower interest rates.
“Several years ago, I worked with a client with an outstanding HELOC balance of $150,000 at a variable interest rate of 6.5%,” Salahi said. “By refinancing into a fixed-rate HELOC at 4.25%, they achieved substantial savings, reducing their monthly payments by over $300 and saving thousands in interest over the life of the loan.”
Increase Available Credit
Another scenario where refinancing a HELOC can be advantageous is when seeking to increase your available credit line.
“As homeowners build equity through mortgage payments or property appreciation, they may be eligible for a higher line of credit. Refinancing can unlock this additional borrowing power, providing financial flexibility for future needs or investments,” Salahi said.
Seek Financial Advice
If you’re considering a HELOC refinance, don’t be afraid to seek advice from financial advisors or real estate experts.
“They can help you navigate the ins and outs of refinancing and make sure you’re making the best decisions for your situation,” Quiroga said. He also stressed, “Refinancing isn’t just about the short-term gains.”
You’ll want to think about how your financial situation might change in the future and pick a refinance option that sets you up for success in the long run.
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