Will a HELOC affect my ability to refinance later?

Life has a way of presenting opportunities, sometimes when we least expect it. Maybe you’ve decided that the time is right to refinance, but you’re wondering if your home equity line of credit might complicate things. Or you’re considering borrowing against your equity for a major expense but you don’t want to box yourself out of a refinance in the near future.

Having multiple financial tools working for you doesn’t necessarily mean you have to choose between them. Many homeowners with a HELOC have successfully refinanced their mortgage. 

Here’s what you need to know.

Can you refinance your mortgage if you have a HELOC?

Yes, it's possible to refinance your mortgage even if you also have a HELOC. A refinance loan is one type of mortgage. A HELOC is another. 

Refinancing replaces your existing mortgage loan with a new one. You might choose to refinance if you want to:

• Change your mortgage repayment term

• Lower your interest rate

• Move from an adjustable-rate mortgage (ARM) to a fixed-rate loan

• Get a different monthly payment

• Switch to a new lender

A possible drawback of refinancing when you have a HELOC is that you may need to meet additional requirements to get final approval for a new loan. 

What is a HELOC? It's a flexible line of credit that's secured by your home, just like your mortgage. Your HELOC credit limit is determined by your credit standing, how much home equity you have, and other factors. Home equity is the difference between what you owe on the home and its value. 

If you qualify for a HELOC, you could use it for just about any purpose:

• Consolidate credit card debt

• Make much-needed home improvements

• Cover a large expense, like a wedding or college tuition

When you get a HELOC, the first few years are called the draw period. That’s when you can borrow, repay, and borrow more as often as you like, up to your credit limit. When the draw period ends, you enter the repayment period and can’t borrow more. You’ll pay back what you borrow with interest, typically over five to 30 years. 

Achieve Loans expert tip: Learn how to fund your financial future with a 30-year HELOC.

What does "subordination" mean on a mortgage, and why does it matter?

You can refinance your mortgage when you have a HELOC, but you may need to jump through some extra hoops to do so. Specifically, you may need to get your HELOC lender to agree to subordination. 

Subordination is the order in which mortgages are paid off when there's more than one loan against the home. Here's a quick primer:

• The mortgage you used to buy the home is a first mortgage or senior lien.

• HELOCs and home equity loans are second mortgages or junior liens. 

• If you sell your home, the lender who holds the primary mortgage gets paid first. Second mortgages are paid next. You get what’s left.

• If you lose your home to foreclosure, the order is the same, but you don’t get to keep the profit because at that point the bank owns the home.

When you refinance a first mortgage, you pay off your old mortgage. That makes the HELOC automatically move into the first lien spot. But your refinance mortgage lender will insist on being in the first lien position. This is normal for mortgage lenders. You won’t be able to finalize your refinance loan unless the HELOC lender agrees to stay in the second lien position. 

Subordination is insurance for the refinance lender. If you can't pay your mortgage or you sell your home, the refinance lender knows they'll get paid first because your HELOC is still considered a second lien. 

Achieve Loans expert tip: Learn how to compare a HELOC vs. home equity loan.

Will a HELOC make it harder to qualify for a mortgage refinance?

A HELOC could make it harder to qualify for refinancing if the lender requires subordination to complete the loan process. The HELOC lender has to agree, which you might assume would be a given, but that's not always the case. 

If the HELOC lender turns down a subordination request, that will narrow your options a little. You might need to repay your line of credit in full to move ahead with a refinance loan. If you don't have enough cash to clear the balance, you might not be able to refinance.

Even if the HELOC lender agrees, you still need to meet the refinance lender's other requirements. Generally, that means you have:

• Good credit

• Sufficient equity

• Steady income

• A debt-to-income (DTI) ratio low enough to afford your debt payments, including the new loan

Your DTI ratio shows how much of your gross income goes to debt repayment and housing each month. If your DTI is high because of your monthly HELOC payments, that could affect your ability to qualify for a refinance loan. 

Achieve Loans expert tip: Use this debt-to-income ratio calculator to find your DTI.

Should you take out a HELOC if you know you want to refinance your mortgage later?

Refinance plans aren't a reason to back away from a HELOC. You'll just need to consider how your HELOC lender will approach the situation when you're ready to refinance. 

If you've picked out a lender but have yet to apply for a home equity line of credit, ask about the subordination policy. Clarify what requirements you may need to meet, if any, before you can refinance a mortgage while your line of credit is open. 

And if you don't have a HELOC lender yet, consider a fixed-rate home equity line of credit from Achieve Loans. We offer flexible funds and terms, low monthly payments, and fast funding once approved. 

What’s next?

• Use a home equity calculator to estimate how much equity you have in your home and what you may be able to borrow with a HELOC. 

• Compare refinance rates to find out which lenders offer the best terms on a new home loan. 

• Talk to a HELOC expert today about subordination and how that could affect your ability to refinance your current mortgage.