Got a HELOC? It Could Be Time To Wrap It Into Your First Mortgage

A home equity line of credit (HELOC) is an excellent tool to tap small-to-moderate amounts of your home’s equity.

However, HELOCs come with much higher interest rates than regular mortgages. When there's no longer a need to access the line of credit, borrowers may consider consolidating their HELOC into their primary mortgage.

Can You Pay Off a HELOC With a Rate-and-Term Refinance?

Generally, you can’t pay off a HELOC with a rate-and-term (no-cash) refinance apart from one exception:

If your line of credit was used to acquire the property – then you may be able to wrap it into a no cash-out refinance.

This type of HELOC is generally part of a piggyback strategy to finance a first mortgage at 80% and avoid paying private mortgage insurance.

You must also have used the entire HELOC balance for the home’s purchase and cannot have tapped into the funds since then.

If you opened your home equity line of credit after purchasing the property or otherwise don't meet these criteria, you can only wrap it into your first mortgage with a cash-out refinance.

Paying off a HELOC With a Cash-Out Refinance: Cost Breakdown for 2 Scenarios

Here are a couple of different example scenarios. We will cover how refinancing at both a lower and higher interest rate than your current mortgage may affect your monthly payments. We'll also review the long-term interest you'll pay on your HELOC debt.*

1. Refinancing From a Higher Interest Rate

Refinancing both your first mortgage and home equity line of credit to a lower interest rate is the best-case scenario as it can lower your payment.

For Example: You currently owe $275,000 on a 30-year mortgage at 7% interest. You also have a HELOC for $50,000, currently at 9.5% interest.

You’ve spoken with a lender and are pre-qualified for a cash-out refinance to consolidate both into a $325,000 loan at 6% interest yielding a $1,950 payment.

In this scenario, you could refinance both debts for lower than your current mortgage payment thanks to the interest rate reduction.

However, refinancing the HELOC into a 30-year mortgage will result in a total of $57,920 in interest costs.

For 25- or 30-year HELOCS, this could be a savings. But if you're refinancing a shorter-term (10- or 15-year) line of credit, you might pay more in long-term interest.

2. Refinancing From a Lower Interest Rate

In some cases, it may make sense to wrap your HELOC into a cash-out refinance even if you currently have a lower interest rate. This is especially true if you’re about to enter the repayment period of your line of credit. However, this strategy won’t benefit everyone.

For Example: You currently owe $250,000 on a 30-year mortgage at 4% interest. You also have a HELOC for $50,000, currently at 9.5% interest.

You’ve spoken with a lender and are pre-qualified for a cash-out refinance to consolidate both into a $300,000 loan at 6% interest yielding a $1,800 payment.

Refinancing could cut your monthly payments by around $30 in this scenario. With closing costs, this isn't the most attractive outcome. And that's not even considering the nearly $58,000 in interest you’ll pay by refinancing your HELOC over the 30-year timeframe.

If you currently have a small-to-moderate HELOC balance and a super-low interest rate on your first mortgage, you may be better off considering refinancing alternatives such as a home equity loan.

However, it may still make sense for borrowers with a larger HELOC and smaller first mortgage.

Pros & Cons of Using a Cash-Out Refinance to Pay off a HELOC

If you’re currently paying on a HELOC, there are some convincing reasons you may choose to use a cash-out refinance to pay it off. At the same time, make sure to keep the negative consequences in mind.

Pros

1. Your monthly payments are likely to drop, but mainly due to extending your repayment timeframe.

2. Payments on a fixed-rate first mortgage will be more predictable than with an adjustable-rate HELOC.

3. Combining your mortgage and HELOC simplifies your monthly finances. You can wrap both loans into a single payment.

Cons

1. Paying off a HELOC with a cash-out refinance means refinancing your debt over a longer period. Even at a lower rate, you're likely to pay more in interest.

2. Refinance closing costs are based on the total amount of the loan. When refinancing your first mortgage, these costs will probably be more substantial than with a home equity loan or line of credit.

3. You'll need more than just equity in your home to qualify for a refinance. You also have to meet minimum lending guidelines to be eligible. For conventional loans, that means a credit score of at least 620 and a debt-to-income ratio no higher than 45%.

Refinancing at the End of Your HELOC Draw Period

If you've had your HELOC for years and are approaching the end of your draw period, consider refinancing to avoid your monthly payment increasing. For many homeowners, the costs of a fully amortized mortgage can be staggering compared to the interest-only payments.

Repayment periods can last anywhere from five to 25 years, but here’s what you could expect when transitioning into a typical five-year or ten-year repayment period:

Although you’re likely to pay more interest over 30 years, refinancing may be the most practical option.

Refinancing a HELOC Into a Fixed Home Equity Loan

Sometimes, it makes sense to convert a HELOC into a home equity loan. Some HELOC lenders allow you to lock in all or a portion of your HELOC to a fixed-rate loan. In some cases, you may have to refinance into a fixed home equity loan. Either way, you keep your first mortgage intact.

However, with a home equity loan, you immediately begin repaying your principal, so your payment could rise.

Still, converting a HELOC into a home equity loan could be wise if you have both a low-rate first mortgage and a line of credit nearing its repayment period. This could also be the case if you expect interest rates to rise.

Paying Off a HELOC – Frequently Asked Questions

Do You Have to Pay Off Your HELOC to Refinance?

Not necessarily, although there are several additional hoops that you’ll need to jump through during the lending process. In reality, you may have difficulty finding a lender willing to refinance your first mortgage without paying off your HELOC. For most borrowers, a cash-out refinance is a better option.

Are There Penalties for Paying off a HELOC Early?

You may encounter an early closure fee if you opened your HELOC within the past few years. Also called prepayment and early termination fees, these often run 3-5% of your loan balance and can apply for several years after opening your HELOC. Check with your current lender to see if an early closure fee applies to your loan.

Can You Convert a HELOC to a Fixed Rate?

Sometimes, lenders who offer HELOCs have a program for converting the rate from adjustable to fixed. While this can be good if rates increase, you may pay more if rates decrease. Plus, you'll almost certainly pay more interest on a long-term HELOC than a cash-out refinance first mortgage.

Lowering Your Monthly Payments With a Cash-Out Refinance

If you want to reduce the interest on your HELOC debt and are tired of making two separate mortgage payments, a cash-out refinance could be your best option.

Apply with an experienced lender today to determine how much you could lower your monthly costs by paying off your HELOC with a cash-out refinance.

*Note: The scenarios in this article are basic estimates based on example rates and don't include variable factors like taxes, insurance, and closing costs. Long-term interest doesn’t include added costs due to extending your principal repayment. Talk with a lending professional for a more comprehensive idea of how a cash-out refinance may affect your payments.