Monday, February 17, 2025
HomeLoansCan you refinance a home loan or a HELOC?

Can you refinance a home loan or a HELOC?

With secondary mortgages like home equity loans and home equity loans (HELOCs) growing in popularity recently, I thought it would be wise to talk about next steps.

What happens, for example, if you want to refinance the loan, either to change the loan program or to obtain a lower interest rate?

Well, similar to a first mortgage, there are also plenty of refinancing options for HELOCs and home equity loans.

In fact, you can even pay off the HELOC or home equity loan with your first mortgage.

Although with interest rates on existing first mortgages so cheap at the moment, that probably won’t be the draw!

Can you refinance a home loan?

Old mortgage New home loan
Balance $50,000 $100,000
Interest rate 8% 7%
Loan period 20 years (15 left) 20 years
Monthly payment $418.22 $775.30

Yes. Similar to a first mortgage, you can refinance a home loan to take advantage of a lower interest rate.

Or to obtain a larger loan amount, perhaps because you need to borrow more money for additional projects or expenses.

You can also refinance the loan if you are looking for a different type of loan, or to consolidate the loan into a first mortgage.

It is also possible to reduce your monthly payment by extending the loan term, provided you are okay with paying additional interest.

Conversely, it is possible to refinance the home loan to a shorter loan to reduce interest expenses and pay it off faster.

Long story short, you have plenty of options provided you are creditworthy and qualify for a new loan.

Check out my example above where an existing home loan is refinanced into a new one with a larger balance.

The monthly payment increases as you borrow twice as much, but the rate decreases slightly because the interest rates decreased from the time the loan was taken out (hypothetical scenario).

Note that you do not need to borrow more when refinancing. you can simply refinance at a lower rate if available. Or in the shorter or longer term.

Can you refinance a home loan?

Old HELOC New HELOC
Balance $50,000 $100,000
Interest rate 8.5% 7%
Loan period 30 years (20 left) 30 years
Monthly payment $433.91 $583.33

Yes, you can also refinance a home equity line of credit. Some banks will even let you do a HELOC refinance in-house through a streamlined process.

So it can be very simple and fast, provided you stay with the same bank. And if you do, you can borrow more (larger credit limit) and obtain a completely new drawing period, which is typically 10 years.

For example, if you’ve had your HELOC for nine years and it’s about to switch to the repayment period, you can refinance it and extend the drawing period for another decade.

The only caveat with this is that banks will typically require you to pay principal and interest each month instead of just interest.

However, if you refinance your HELOC with another bank or lender, you may be able to obtain a new drawing period that only requires interest-free payments.

And you should probably shop around anyway to see if an external bank/lender has a better rate than what your current bank is offering.

Just be sure to be aware of all terms, closing costs, early closing rules, etc.

In the example above, the old HELOC is refinanced into a new HELOC with a new 10-year grace period and a lower interest rate (thanks to a better margin!) from another bank.

The monthly payment increases by about $150, but you now have an additional $50k at your disposal and can make interest payments again.

Again, you do not need to borrow more when refinancing. you can simply refinance at a lower rate if available. Or extend your loan period and/or grace period.

Can you pay off a HELOC with a home loan? Or vice versa?

The short answer is yes. If you have a HELOC and want a home loan instead, you can pay off the HELOC with the funds from a home loan.

In this way, you can lock in a fixed interest rate if you are worried that the interest rate will move up.

The biggest downside to a HELOC is that the interest rate is variable (tied to the prime rate), so the peace of mind that comes with a fixed-rate home loan may be worthwhile for some.

The opposite is also true if interest rates fall and you want the option of a HELOC.

You can pay off the home loan with a HELOC, which can have a lower interest rate that could even get lower if the Fed is expected to lower interest rates in the future.

Additionally, you would have a line of credit that could possibly be drawn on beyond the repaid balance. And you would be able to make interest-free payments.

For example, if you paid off a $50,000 home loan with a $100,000 HELOC line, you would have an additional $50,000 at your disposal.

You can borrow more if needed and continue to borrow during the draw period, with interest-free payments if you wish.

So you would get a bit more flexibility there, but keep in mind that HELOC rates can go up too!

The only problem with this arrangement is whether or not the lender will allow you to pay off the home loan with the HELOC at closing. Be sure to ask before proceeding.

How can I lower the interest rate on my home loan?

Old mortgage New home loan
Balance $50,000 $50,000
Interest rate 10% 7%
Loan period 20 years (15 left) 20 years
Monthly payment $482.51 $387.65

If you’re looking for a lower interest rate on your home equity loan or HELOC, consider refinancing.

The examples from above involved taking out larger loan amounts in order to borrow more.

But it is also possible to refinance one of these types of loans without borrowing more, simply to get a payment exemption.

And it would make sense if the interest rate improved since you first took out your loan.

For example, if you got a home loan when interest rates were 10% and they have since dropped to 7%, you could potentially save a good amount of money.

In my example above, about $100 per month. Not too shabby, even if you reset the clock with a new 20-year period.

If you have a HELOC, it’s likely a variable rate loan, and the rate may have automatically decreased over time if interest rates improved thanks to a lower prime rate.

In this case, you may not need to refinance to take advantage of a lower rate.

How much does it cost to refinance a home loan?

Like everything else, it depends. You may be subject to a loan origination fee, which is typically percentage-based.

For example, if you refinance a $50,000 loan and there is a 1% fee, that would be $500. A 2% fee would be $1,000.

But it is also possible to refinance to a new home loan (or line) without any closing costs or fees.

But the catch is that the interest rate is likely to be higher, other things being equal. But if you shop around enough, you may be able to find a low price without the fees.

This is all the more reason to collect multiple offers from multiple banks and lenders to explore what’s out there.

You can also pay off a HELOC or home loan via first mortgage refinancing

Another way to pay off a HELOC or home equity loan is simply by refinancing to your first mortgage.

So we know you can refinance an existing HELOC with another HELOC, or existing home loan with a new home loan.

In addition, you can pay off one of these second mortgages with your first mortgage and combine the two loans into a single loan.

Today this does not make much sense in most situations because the majority of homeowners have very low fixed rate 1st mortgages. And when you refinance, you lose the low interest rate.

For example, if you have a $300,000 first mortgage set at 4% and a $75,000 HELOC, you can refinance the loans into a single loan for $375,000.

However, the total loan amount would result in a higher loan-to-value ratio (LTV). But if you had plenty of home equity, this might not be a problem.

Say the property is worth $500,000. The new LTV would be 75%, which is a fairly low LTV and one that would not be subject to too many loan level pricing adjustments (LLPAs).

Another thing to consider is that if the second mortgage you refinance is paid off via a first mortgage, it will be considered a cash-out refinance, even if you don’t take extra proceeds, assuming it was a non-purchase money second mortgage.

So the price adjustments that apply to cash-out refinances will be in play, potentially leading to a higher mortgage, all things being equal.

To sum things up, home equity loans and lines of credit aren’t much different than regular mortgages, just in the second lien position (assuming you don’t have a first mortgage).

This means that the same options are generally available to refinance them, switch loan programs or pay them off at varying rates.

There are even options to get a fixed rate HELOC or apply a fixed rate to a portion of your credit line. So there is some crossover between the products these days.

Be sure to consider and understand all of your options if you have obtained one of these loans, or are considering applying for one.

Read on: Payout vs. HELOC vs. housing loan

Colin Robertson
Last post by Colin Robertson (see all)

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