Can You Apply for a HELOC After Refinancing?

If you’ve recently refinanced your mortgage, but you need extra money for a large expense—like closing costs, home improvements, or an emergency—you may be wondering if you can apply for a home equity line of credit (HELOC). 

The good news is that, yes, it is possible to apply for a HELOC after refinancing. But there are a few caveats to keep in mind.

Can you have a mortgage and a HELOC at the same time?

Yes, you can have a mortgage and a HELOC at the same time. Similar to when you refinanced, you’ll need to apply for the HELOC and get approved by a lender. 

The lender will look at your credit score, income, and home equity to determine if you’re eligible. Generally, you need to have at least 15% equity to qualify for a HELOC. So if your home is appraised for $300,000, this means your loan balance should be no more than $265,000. 

Having both a mortgage and a HELOC means you’ll have two loans to repay, which can be a financial burden, so make sure the additional debt will fit into your budget. If you are a dual-income household, you may want to base your calculation on one income source in case there is a job loss, short-term disability, or long-term disability.

Now that you know the basics. How will a recent refinancing impact your eligibility for a HELOC? Let’s take a closer look at that now. 

How does a mortgage refinance impact your eligibility for a HELOC?

Refinancing your mortgage can have mixed effects on your HELOC eligibility. 

• Negative effect: Refinancing your mortgage can lower your credit score, as it involves applying for a new loan and having a hard inquiry on your credit report. Refinancing can also change your debt-to-income ratio, which is the amount of debt you have compared to your income. If your debt-to-income ratio increases, it can make it harder to qualify for a HELOC.
• Positive effect: If you’ve built up equity in your home through the refinance, you may have more equity to borrow against with a HELOC. Also, if you refinance to a lower monthly mortgage payment, your debt-to-income ratio may drop and make it easier to qualify for a HELOC. As you make on-time payments, you should see your credit score increase and reflect positively on your credit report.

How soon after refinancing can you get a HELOC?

While you can technically apply for a HELOC anytime after a refinance, it may be best to wait a few months to improve your chances of getting the best terms. Here is why:

• Factors like hard credit inquiries can stay on your credit report for up to two years. Check your credit report to see how any inquiries from your refinance may have affected your score. 

• If you have a higher monthly payment after refinancing, it can increase your debt-to-income ratio and make it harder to qualify for a HELOC. You can lower your DTI by increasing your income or paying down your debt.
• If your loan-to-value ratio has increased after refinancing—maybe because you rolled your closing costs into your mortgage or your home’s appraised value decreased—you may need to wait until your equity has increased to apply for a HELOC. 

You can calculate your LTV by dividing your mortgage balance by your home’s appraised value. 

LTV = mortgage balance / home’s appraised value

For example, if you owe $200,000 and your home is worth $250,000, your LTV is 80%. A maximum LTV of 85% is generally preferred by most lenders.

When does it make sense to get a HELOC after a refinance?

According to Erin Kinkade, CFP, a good way to assess if applying for a HELOC is right for you is to weigh the pros and cons.

Write down the pros and cons of applying for a HELOC side by side—on an actual piece of paper! Assess the monetary value of the pros and cons to determine if the benefits outweigh the drawbacks.

Erin Kinkade

CFP®

Refinancing and applying for a HELOC can both add hard inquiries to your credit report. But the benefits of a HELOC may outweigh this drawback in these situations.

• You need to finance home repairs. If you need to fix a leaky roof or replace a broken furnace, a HELOC can give you the money you need to get the job done quickly. It can allow you to complete a project without draining your emergency savings. 
• You want to consolidate high-interest debt. If you have credit card debt or high-interest loans, rolling them all into one HELOC payment can potentially help lower your interest rate. 
• You must cover a large expense. There may be times when you’re hit with a large expense that you don’t have time to save up for, like an emergency surgery or vet bill. A HELOC can provide the funds you need to cover the expense without having to wait.

Ask the expert

Erin Kinkade

CFP®

Of course, there are situations where the cons outweigh the pros, but you still need to apply for the HELOC. For example, you must cover a large expense and there is no emergency fund established or other reserve to draw from. To decide if it is the best choice for you, do your own research, then consult with a trusted friend or family member, financial counselor, or other financial professional to make the best decision.

How to apply for a HELOC after refinancing

Use these steps to apply for a home equity line of credit after refinancing your mortgage:

1. Check your credit score for free through your credit card company or by grabbing a credit report from any of the three major bureaus. 
2. Get prequalified with a soft credit check, so you can estimate what terms and interest rates you may qualify for.
3. Speak with your mortgage lender if you recently refinanced your mortgage. Some lenders offer savings or discounts for using them twice.
4. Shop around for the best rates by comparing APRs from at least three different lenders. Read the fine print to understand any fees or penalties associated with the HELOC.
5. Gather up these documents to speed up the application process: your address, Social Security number, pay stubs, tax returns, and other proof of income.
6. Submit your HELOC application once you’ve found a lender you want to work with. They’ll review your application and determine if you qualify for a HELOC.

Cash-out refinance vs. refinance and HELOC

If you haven’t refinanced yet, you could consider a cash-out refinance loan instead of refinancing and getting a HELOC. 

A cash-out refinance allows you to refinance your mortgage for more than you currently owe and receive the difference in cash. It saves a step because you only take out one loan instead of two. 

Cash-out refinance loans can be good if you need a large amount of cash upfront and want to pay it back over time, usually with a fixed interest rate. Exact terms may vary by lender, but generally, you can expect these differences. 

	Cash-out Refinance	Refinance and HELOC
Interest rate	Fixed or adjustable rate	Refinance: Fixed rate HELOC: Variable rate
Loan term	30 years	Refinance: Same as existing loan term HELOC: 10-year draw period; 10-20 year repayment period
Upfront costs	Closing costs	Closing costs + HELOC fees
Monthly payment	One payment	Two payments (mortgage + HELOC)
Flexibility	Less flexible	More flexible
Access to equity	Immediate access to all equity	Access to a line of credit, so you can draw from equity as needed

Ask the expert

Erin Kinkade

CFP®

If you need a large lump sum immediately, a cash-out refinance would be best. If you need money but do not know the amount yet, a HELOC might be better. If you want one payment and not two, I would go with the cash-out refinance. It is also key to note that the cash-out refinance restarts the loan term, which could be desirable to some but not to others. Also consider something that would potentially not incur fees, such as borrowing from a trusted friend or family member. Or, establish a savings plan to reach the goal you are looking to accomplish. If it is an emergency, I suggest a personal loan first. As a last resort, consider a credit card.

Do you need approval from your refinance lender to take out a HELOC?

You shouldn’t need approval from your refinance lender to take out a HELOC, and it shouldn’t impact your mortgage terms unless you take out the HELOC before you refinance. 

In general, the first lien on your property has the highest priority, followed by subsequent liens in the order in which they were recorded. 

So if your first lien is your refinanced mortgage, the HELOC will have a lower priority and most likely won’t impact your refinance terms. But if the HELOC is listed first, it can impact your ability to refinance if you want to do so down the road.