What to know about home equity refinancing

If you have an existing home equity loan and need to fund a new project, take advantage of lower interest rates or even change payment terms, you can create flexibility through home equity refinancing. You might even consider refinancing to a home equity line of credit (HELOC).

What can refinancing your home equity loan into a HELOC do for you? If you open a HELOC, you may receive better terms and lower monthly payments that could save you money. You might also be able to tap into additional funds, but you'll need to consider several factors first.

Reasons to refinance your home equity loan

A lot can change in the years after you take out your original home equity loan, and many of them are a good cause to consider home equity refinancing. Refinancing your home equity loan could help you:

• Reduce your monthly payment
• Lock in a lower interest rate
• Switch from a fixed rate to an adjustable rate to take advantage of decreasing interest rates
• Borrow additional funds for a new project or need
• Shorten or extend repayment terms

What to consider before refinancing

Once you have determined you could benefit from home equity refinancing, you can take a few preliminary steps to make sure you are getting the most from your new loan or HELOC:

• Calculate how much equity you currently have available: Using the loan-to-value ratio, you can gain insight into the equity on your property. Don't forget to subtract the amount of your existing home equity loan and any current mortgage from the estimated value of your home.
• If you are looking to borrow additional money, establish your borrowing needs: What are you looking to accomplish with your additional funds? How much additional cash do you need to reach your goals? Make sure you have enough equity in your home to cover both the original loan amount plus the additional borrowing.
• Set realistic payment goals: If you refinance your home equity loan to a HELOC, you are taking out a completely new line of credit. This means new payment terms and monthly payments. Make sure this option works best with your current financial situation and needs. Interest rates on HELOCs are variable dependent on market conditions, which you'll want to take into consideration when choosing to refinance a home equity loan to a HELOC.
• Do the math first: If you are looking to refinance your home equity loan to a HELOC to lower your payments, do the math first. Make sure you're aware of any closing costs or other fees. Determine how many months it will take you to cover the fees. It's not worth refinancing your home equity loan if your fees negate your monthly savings.
• Consider your current situation: A lot may have changed since you originally took out your home equity loan. Before you apply for HELOC, find out what documentation you need and check your credit score to see if you qualify for the best rates.

Refinancing a home equity loan to a HELOC: What to know

A HELOC is a line of credit, like a credit card, secured by the equity in your home. Unlike a home equity loan, where you receive a lump sum of money at one time, with a HELOC, you can withdraw funds as needed up to your credit limit during the draw period, which usually lasts 10 years. During the draw period, you have the option of only making payments on the interest. Then during the repayment period, you will be required to begin making payments on the principal amount.

While HELOCs are typically associated with home improvement projects, you can also use a HELOC to pay off higher-interest credit cards and loans, including your home equity loan.

What else to consider when refinancing your home equity loan to a HELOC

Refinancing your home equity loan into a HELOC could help you get a lower interest rate, potentially reducing your monthly payments. Keep in mind, however, that HELOCs have a variable interest rate, which is tied to the prime rate, meaning your interest rate could go up or down, changing your monthly payment.

How to refinance your home equity loan to a HELOC

To qualify for a HELOC, you'll typically need a good credit score, a low debt-to-income ratio and a loan-to-value ratio below 85%. Be sure to include your current home equity loan and any primary mortgage when calculating your loan-to-value ratio.

After selecting a lender, you'll apply for the new line of credit, providing necessary documentation like proof of income, credit reports and details about your home.

If approved, you'll use the new HELOC to pay off your existing home equity loan, and you'll begin making monthly payments based on the new HELOC's terms.

Consider refinancing your home equity loan to a HELOC today

If you're looking to reduce your monthly payments or borrow more money against your home's equity, refinancing your current home equity loan to a HELOC might be a smart option for you. With Citizens FastLine®, you can view your personalized HELOC offer in minutes with no commitment and no impact to your credit score. Once you accept your offer and apply, you can be ready to close in as few as seven days and have funds in as little as two weeks. Plus with Citizens, there's no application fees or origination fees.^†

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