What Happens to a HELOC When You Refinance?

A Home Equity Line of Credit (HELOC) allows homeowners to borrow against their home’s available equity. This revolving credit line functions similarly to a credit card, using the home as collateral. Home equity is the difference between a home’s current market value and the outstanding mortgage balance. Refinancing a primary mortgage involves replacing an existing home loan with a new one, often to secure different terms or a new interest rate. When homeowners refinance their primary mortgage, an existing HELOC adds considerations for managing both loans.

Common Outcomes for Your Existing HELOC

When refinancing a primary mortgage, an existing HELOC can be handled in several ways, each with different financial implications. One common outcome involves paying off the HELOC entirely as part of the new mortgage. The new mortgage loan amount covers both the original mortgage balance and the HELOC’s outstanding balance. This closes the HELOC account, and its lien against the property is released. Consolidating these debts into a single, new first mortgage can simplify monthly payments and potentially offer a lower overall interest rate if primary mortgage rates are more favorable.

Another possibility is to subordinate the HELOC, allowing it to remain open but shifting its lien position. A primary mortgage typically holds the first lien position, meaning it gets paid first in a sale or foreclosure. When the original mortgage is paid off through refinancing, the HELOC would automatically move into the first lien position. To prevent this, the HELOC lender must agree to a subordination, an agreement confirming the HELOC will retain a second lien position behind the new first mortgage. Homeowners might choose this option to maintain access to a flexible line of credit for future needs without new application costs.

A third approach involves consolidating the HELOC balance directly into the new primary mortgage, often through a cash-out refinance. With this option, the new mortgage is for an amount larger than the existing first mortgage balance. Excess funds then pay off the HELOC, combining both debts into a single, larger primary mortgage. This can simplify debt management with one mortgage payment and may lead to a lower interest rate on the combined balance, as primary mortgage rates are often lower than HELOC rates. However, this means the HELOC balance becomes part of a long-term mortgage, potentially increasing total interest paid over time.

Steps During Your Mortgage Refinance

Navigating a mortgage refinance with an existing HELOC involves several steps requiring coordination among parties. The process begins with early communication with both your current HELOC lender and the new mortgage lender. Informing both institutions about your refinance plans helps ensure a smoother transition and allows them to prepare for necessary actions, whether paying off, subordinating, or consolidating the HELOC. This dialogue can also help identify any specific requirements or potential delays from either lender.

As the refinance progresses, gather necessary HELOC information and documentation. Lenders require details such as the HELOC’s current balance, recent account statements, and any existing terms or conditions. This documentation helps the new mortgage lender assess your overall debt and equity position for underwriting the new loan. Providing these documents promptly helps avoid delays in the refinance timeline.

Lender and title company coordination is central to managing the HELOC during a refinance. The new mortgage lender, existing HELOC lender, and the title company work together to execute the chosen outcome. If the HELOC is being paid off, the title company obtains a payoff statement from the HELOC lender to ensure the correct amount is disbursed at closing. If subordination is planned, the title company facilitates the formal subordination agreement that re-establishes the new first mortgage’s priority lien position. The title company acts as a neutral third party, ensuring all financial and legal aspects are handled correctly.

The final stage is the closing process, where all documents are signed and funds are disbursed. Depending on how the HELOC is handled, specific documents like lien releases, subordination agreements, or updated loan disclosures will be signed. For a payoff, the HELOC balance is settled from the new mortgage proceeds, and the HELOC account is officially closed. If subordinated, the new mortgage becomes the primary lien while the HELOC remains open in a secondary position. The closing ensures all legal and financial obligations related to both the original mortgage and the HELOC are addressed.