Refinancing a HELOC
This article is for educational purposes only. JPMorgan Chase Bank, N.A., currently offers home equity lines of credit (HELOCs) in select states and does not offer home equity loans in any state. Please talk with a Home Lending Advisor to see if HELOCs are available in your area. Any information described in this article may vary by lender.
Quick insights
- Refinancing a HELOC can lead to lower interest rates if your financial profile has improved or if better rates are available from other lenders.
- Switching from a variable rate to a fixed rate through refinancing can result in more predictable monthly payments, potentially helping with budget management.
- Refinancing can extend the draw period of a HELOC, allowing continued access to funds for new projects or to consolidate higher-interest debt.
As a homeowner, having equity available to use for projects and expenses can be a big plus. If you have an existing home equity line of credit (HELOC) or are considering one, you may be wondering if you can refinance it. In short, yes; in many situations, you can refinance a HELOC. In this article, we’ll talk through some of the reasons to refinance a HELOC and ways to determine if it’s a good option for your situation.
What is a HELOC and how does it work?
For those who need a refresher or are just getting familiar with the concept, a HELOC is a home equity line of credit. It’s a form of revolving credit, that’s backed by the equity you’ve accumulated in your home. A HELOC can be spent to a set maximum and repaid on a recurring basis during its draw period, which typically lasts 5–10 years. When the draw period ends, the repayment period begins, and any remaining balance must be repaid to ultimately close the account.
Reasons to consider refinancing a HELOC?
There are many reasons why a person might consider refinancing their HELOC. Some common reasons include:
- Interest rate reduction: The interest rate associated with your HELOC may be higher than you would like. If aspects of your financial profile have changed, or you find a new lender with better rates, it’s possible that refinancing could allow you to pay a lower interest rate.
- Payment stability: Those with variable rate structures on their HELOC may later determine they want a fixed rate structure. Refinancing to a fixed-rate loan can help stabilize the monthly payment size for someone who has been paying at a variable rate.
- Extend the draw period: Someone with a HELOC that is nearing the end of their draw period may also consider refinancing. By refinancing with a new HELOC, that person may be able to carry forward their balance and/or continue spending on new projects and repaying.
- Consolidate debt: Someone who has accumulated outside debt may want to refinance to incorporate that balance into a HELOC with a higher limit. This strategy might be relevant if the debt exists on an account with a higher interest rate, such as a credit card or personal loan.
When should you refinance your HELOC?
So, is it a good time to refinance your HELOC? To answer this question, you’ll need to evaluate your existing HELOC, options for refinancing, and the overarching conditions.
It can be helpful to get specific about what you hope to gain by refinancing your HELOC. You may want to refamiliarize yourself with your current HELOC, including confirming your current interest rate (and type), noting the remaining length of the draw period and the account’s outstanding balance.
Ask:
- What about the current HELOC isn’t working (or could work better) for your financial goals?
- Are you hoping to lower your monthly payments, reduce total interest costs, or access more credit?
Assessing market conditions and readiness
Being approved for better terms could be as simple as working with a different lender. However, the rates and terms that are available to you are also influenced by various personal and market factors:
- Personal factors: Details like your credit score, payment history, debt-to-income (DTI) ratio and overall home equity can influence the rates you’re presented with. From a lender’s perspective, these factors can make an applicant look more or less risky as a borrower. Someone who appears stable and creditworthy may be approved for favorable rates and terms.
- Market factors: Interest rates are also affected by broad macroeconomic conditions. The U.S. Federal Reserve periodically updates the federal funds rate to help steady or stimulate economic activity, which impacts borrowing costs for banks and consumers. As a result, the point in time you choose to refinance your HELOC could result in generally lower or higher interest rates.
Options for refinancing a HELOC
One possibility for refinancing a HELOC is to incorporate it into a new HELOC account, but this may not be your only option. Common refinancing options include:
- Standard HELOC refinancing: This solution may be appropriate for someone whose draw period is nearing its end but wants to continue using a HELOC and/or improve their interest rate.
- Home equity loan: Some may prefer refinancing their HELOC to a home equity loan with a lump sum, potentially with a lower, fixed rate.
- New first mortgage: Refinancing an existing HELOC and mortgage into a new primary mortgage offers a way to consolidate both loans into a single monthly payment.
- Cash-out refinance: If you need additional cash in addition to consolidating your loans, a cash-out refinance (which allows you to borrow additional money) may be useful. However, be mindful that it has the potential to increase your overall debt.
The refinancing process
What should someone expect as they prepare to refinance their HELOC? Depending on the lender, the process can be similar to getting a new mortgage or a HELOC.
Step 1: Compare lenders
As you assess different lenders for your refinance, be sure to consider all aspects of their service, plus their reputation. For many planning to refinance, comparing based on rates and terms is a good priority. However, it’s prudent to also gather information relating to closing costs, application fees and penalties associated with each service. Finally, reading recent reviews can provide insight into potential difficulties with a certain lender.
Step 2: Application and underwriting
While the exact requirements and process are likely to vary amongst types of loans and lenders, there are some elements you can expect to see. It may be helpful to gather relevant documents ahead of your application for a smoother process, such as:
- Proof of income: Recent pay stubs, W-2s, tax returns (especially if self-employed), 1099 forms (for freelance or contract work).
- Asset information: Bank statements, statements relating to retirement accounts and investments, documentation for other types of personal assets.
- Debt information: Statements for other outstanding loans, credit cards or other debts.
- Property information: A current mortgage statement, homeowners' insurance policy information, property tax statements, recent appraisal or evaluation information.
- Form of identification: A government-issued ID or passport.
- Miscellaneous: A divorce decree or separation agreement, bankruptcy discharge papers, explanation letters for credit issues or large deposits.
Check with the lender to determine exactly which documents will be necessary. After an initial review of your documentation, lenders typically provide an initial offer with an interest rate that can be locked in while underwriting is completed. The underwriting phase often requires a professional home appraisal to confirm the home’s current value before the final offer is issued for signing.
Step 3: Closing
For most types of refinances, the final step of the process is closing. During this step, you will be presented with the finalized terms for your agreement. Closing costs for a HELOC typically range from 2–5% of the total loan amount, with the potential for additional fees depending on your lender.
In conclusion
Refinancing your HELOC can be a way to optimize short- and long-term expenses, with unique possibilities depending on the method you choose to pursue. For those who are interested in mortgage options with Chase, consider reaching out to a Home Lending Advisor who can discuss your needs one-on-one.
