Can you refinance a home equity loan into a HELOC?
With credit card rates soaring and many consumers struggling due to lingering high inflation and the rising costs of various goods and services, many homeowners have turned to tapping their home equity for cash in recent years.
In fact, about 234,000 home equity lines of credit (HELOCs) were originated in the first quarter of 2024, according to TransUnion. Around 237,000 home equity loans were issued for the same period.
While both moves are smart and can save you money compared to other borrowing products, HELOCs currently have slightly lower interest rates than home equity loans. So, consumers in the latter cohort (those who took out home equity loans) might have a case for refinancing.
Do you have a home equity loan and are thinking about refinancing to a lower-rate HELOC? Are you even allowed to by the lender? Below, we'll detail what you need to know.
Start by seeing what HELOC interest rate you'd be eligible for here.
Can you refinance a home equity loan into a HELOC?
Refinancing is basically starting fresh. You'll swap a current loan with a new one — one with new terms, a new loan amount, a new interest rate and new payments. You can even change the lender if you like, too.
"Yes, you can refinance a home equity loan just like any other loan," says John Aguirre, mortgage broker at Loantown. "You can refinance it into another home equity loan, a HELOC, or consolidate it into a first mortgage."
How to refinance a home equity loan into a HELOC
You have two options if you want to turn your home equity loan into a HELOC. First, you can apply for a HELOC, and then use the funds from that loan to pay off your home equity loan balance, which essentially rolls it into your new HELOC balance.
"You could also refinance your first mortgage to absorb the home equity loan, and then add on the HELOC after the fact," says Rose Krieger, senior home loan specialist at Churchill Mortgage.
In either case, you'll need to shop around and compare lenders (and rates), fill out your lender's application, and submit the required financial documentation. A credit check and appraisal of your home's value are typically required, too.
"The process of refinancing a home equity loan into a HELOC isn't overly challenging," Krieger says. "You just need to work with a loan officer and provide loan documentation, such as pay stubs, W-2s, tax returns, bank statements, and current mortgage statements."
Be prepared, though: The requirements for a HELOC can be strict. Aguirre says you will usually need at least 10 to 20% equity in your home and a debt-to-income ratio of 50% or less. As for credit score, he says, "Qualifications are going to vary per institution, but a good rule of thumb is that the lenders will require a 640 or higher FICO score."
Learn more about your HELOC options online today.
When should you refinance a home equity loan into a HELOC?
Refinancing your home equity loan into a HELOC can be a smart move if you know you can secure a lower interest rate than what you're currently paying on the home equity loan. If you have other debts — like credit cards or personal loans — that have higher interest rates, it's smart, too, as you can use the HELOC funds to pay those off and save on long-term interest.
"HELOCs typically provide lower rates than that of a credit card or personal loan, so this can be an effective move to better manage your debt," Krieger says.
You might also want to refinance into a HELOC if you need continued access to cash. With home equity loans, you receive a single payment and that's that. HELOCs, on the other hand, allow you to withdraw funds over 10 years in most cases. This can be helpful if you're doing an extended renovation of your house or you want a financial safety net just in case.
Just be aware: Home equity loans are usually fixed-rate products, while HELOCs have variable rates. This can mean your rate and payment could rise over time. HELOC rates change each month.
As Aguirre cautions, "Be wary of refinancing out of a fixed rate HELOAN into a HELOC solely for a lower teaser rate, as this could expose you to higher interest rates later on."
There are also closing costs to consider, so make sure you factor those in before applying for your refinance as well.
The bottom line
Whatever you do, make sure you prepare before refinancing any of your mortgage loans. Get your financial documentation in order, and pull your credit report to make sure there are no errors or accounts in collections. You can also work on improving your credit score, as this will reduce the interest rate you're able to get.
Finally, shop around and compare several lenders. Institutions can vary widely on the products, rates, and fees they offer, so shopping around can ensure you get the best possible deal on your HELOC.
