Home equity lines of credit, or HELOC, are home loans that take the form of revolving credit lines. You can refinance a HELOC just as you can refinance any kind of home loan or mortgage. However, you must meet the lender’s eligibility guidelines if you want to refinance your loan. If you qualify, you can refinance with a new HELOC, a fixed home loan or a mortgage.
When you owe money on your home equity line of credit, your lender requires you to make monthly interest-only payments. Since you do not have to pay down principal, your equity debt can rise above the value of your home if home prices begin to depreciate in your area. You cannot refinance your home if your debt exceeds your home value unless you first pay down your equity line so that you have some equity in your house. Typically, you need to have at least 20 percent equity in order to refinance your home.
Debt to Income
Lenders do not sell home equity lines to investment firms or other mortgage companies, and consequently the underwriting guidelines for equity lines are less strict than for other loans. Lenders review your debit-to-income ratio when underwriting a loan and this ratio shows how much of your monthly income goes toward covering your debts. You can get a HELOC with a ratio of up to 50 percent, while most mortgages companies limit the ratio to 43 percent for conventional mortgages. Therefore if you have a high debt-to-income level, you cannot refinance into a conventional mortgage.
When you take out a refinance mortgage, you normally have to pay closing costs, although you can roll these costs into the loan amount if you have sufficient equity in your house. You can avoid paying closing costs if you refinance your equity line with a new equity line or home equity loan since these loans usually have no upfront closing costs. However, your current lender may require you to pay a penalty for closing your existing line early if you paid no closing costs to set it up.
You can increase an existing equity line without refinancing it by asking your bank to modify your current equity agreement. Doing this enables you to keep the same account number and interest rate. However, if interest rates available on new equity lines are lower than on your existing loan, you will benefit from refinancing your entire loan even if it means only slightly increasing your available line of credit. If your lender requires you to pay closing costs on a new line, you should take that expense into account and determine whether a refinance or a line increase makes most sense.