Do You Have to Pay Off a HELOC When Refinancing?

Refinancing a mortgage loan can allow you to reduce your interest rate and monthly payment or get more favorable terms. If you have a home equity line of credit (HELOC), it’s not always necessary to pay off a HELOC when you refinance, but certain lenders may require it.

Even if yours doesn’t, paying off your HELOC can make for a smoother refinance process. Understanding what’s involved in refinancing with a HELOC can help you determine the best steps for your situation.

Do you have to pay off a HELOC when refinancing?

There’s no straightforward answer to this question. When you take out a HELOC, the lender takes a subordinate position to your primary mortgage lender. So if you sell the home or enter foreclosure, the primary mortgage lender gets the first claim on the sale proceeds. If you got both loans from the same lender, the second loan still takes a junior position to the first.

Once that outstanding debt is satisfied, the HELOC lender gets the remaining funds, which may be enough to cover the full balance. When you pay off a primary mortgage with a refinance loan, the HELOC moves into the first position, leaving the refinance loan in the second—an arrangement your new lender won’t agree to.

You’ll need the HELOC lender to agree to be resubordinated and remain in the junior position, yielding priority to the refinance lender. Resubordinating doesn’t have an impact on the HELOC lender’s original position, but you may need to meet certain requirements for approval. Factors the lender may consider include your credit score and the combined loan-to-value ratio (LTV) between the new loan and your HELOC.

If the combined LTV exceeds the HELOC lender’s maximum, for instance, you may not need to pay off the loan, but you might need to pay down some of the balance. But if you don’t meet credit score requirements or your HELOC lender is difficult to work with, you may need to pay off the loan to proceed.

If my lender won’t require me to pay off my HELOC, what happens next?

To refinance your mortgage loan while you have a balance on your HELOC, you’ll need to go through the subordination process with your lender.

Start by notifying your loan officer for the refinance loan about the HELOC. It will contact your HELOC lender to learn what its subordination process entails. You’ll get details about how long it’ll take, which documents you must provide to your HELOC lender, and whether fees are involved.

If you need to meet any requirements, be sure your response is prompt to avoid delays. 

If you’re working with two lenders, you may encounter delays in the process, so follow up with both parties to ensure it’s completed before your new loan closes. Also, note that your HELOC lender may freeze your line of credit until the subordination process is finished. 

What options do I have if I need to pay off my HELOC before I refinance?

If your HELOC lender refuses to resubordinate to the new refinance loan, you can’t meet the lender’s requirements, or the process is too complex, you have several options to pay off the HELOC.

Pay it off with cash

If you have enough cash on hand, consider using it to pay off the HELOC and close the loan. Remember that some HELOCs have a prepayment penalty or early closure fee if you’re still in the first three to five years of the loan—a typical fee is $500. 

Before you go this route, speak with your refinance loan officer about cash reserve requirements. Putting a large chunk of cash toward paying off the HELOC could affect your eligibility with the refinance lender.

Cash-out refinance

If you have significant equity in your home, you may qualify for a cash-out refinance loan. With this option, you can refinance the primary mortgage loan and get cash from your equity, which you’ll use to pay off your HELOC. The new balance equals the sum of the first mortgage balance and the cash you receive.

If you opt for a cash-out refinance, your new lender will pay off the HELOC once the loan closes, and you can use leftover funds as you like. 

This option may be worth considering if you’re in or nearing the repayment period of your HELOC and are making full monthly payments. If you’re still in the draw period and making interest-only payments, ensure you can afford the higher payments of a cash-out refinance before you proceed.

Refinance into a new HELOC

To maintain a revolving line of credit after refinancing your primary mortgage, you may be able to refinance your line of credit with a new HELOC from a different lender. This can allow you to save money on the more expensive closing costs of a cash-out refinance.

However, you’ll need to work with your loan officer to determine whether the lender allows that and to get the timing right, ensuring the new HELOC is subordinated to the refinance loan.