Can you refinance a home equity loan?
Senior Content Writer
Quick insights
- Yes, you can typically refinance a home equity loan if you meet the mortgage lender’s qualification requirements, such as having enough equity, a stable income and acceptable credit.
- Because a home equity loan is a second mortgage—a loan secured by your home while you still owe on your primary mortgage—refinancing works similarly to refinancing a first mortgage.
- Before refinancing, it’s important to compare the costs with the savings. Closing costs, fees and your new interest rate can determine whether refinancing makes financial sense.
A home equity loan can be a way to tap into the value of your home, but what if the loan terms no longer fit your needs? You may be able to refinance a home equity loan, also called a HELOAN. Whether you’re looking to lower your monthly payments or unlock more of your home’s equity, refinancing can be useful. The right solution will depend on your current financial situation, choice of lender and financing terms.
Can you refinance a home equity loan?
Yes, you can refinance a home equity loan. In essence, refinancing means taking out a new loan to pay off your existing one, ideally securing better terms that save you money or better align with your current needs. The process can take about 30 to 45 days. Lenders may require a certain credit score and have a maximum allowed home equity combined loan-to-value ratio (CLTV). Qualification criteria and terms vary by lender.
Some homeowners may choose to refinance with their current mortgage provider, while others might want to research new lenders to find better terms or a different product. The right option for you will depend on your goals.
Reasons to refinance your home equity loan
Here are some common reasons why homeowners may choose to refinance:
- Lower interest rate: Refinancing may help you secure a lower interest rate than the current loan. It may help to check current refinance rates.
- Reduce your monthly payment: Extending the loan term could make payments more manageable.
- Shorten your loan term: Paying off your balance faster can save money on interest over time. However, monthly payments could increase as a result.
- Access additional equity: Tap into the value of your home to work on home improvement projects, consolidate debt or cover other major expenses.
HELOAN refinancing options
You may have a few paths when refinancing a home equity loan, with each addressing a different problem:
- A new home equity loan: Trades your current fixed-rate loan for another one. It can make sense when rates have fallen since you opened your initial loan, or when a longer term would bring your monthly payment down to where you want it. You keep the predictability of a fixed payment; you’re just resetting the terms. Plus, if the new loan is larger than what you owe, you can take the difference in cash.
- Switch to a HELOC: Swaps a fixed-rate loan for a home equity line of credit with a variable rate and flexible draw period. This can make sense if you want ongoing access to credit rather than a lump sum.
- Cash-out refinance: Replaces both your first mortgage and your home equity loan with a single new loan. You get one payment instead of two. If your first mortgage rate is also high, or if consolidation is your goal, a cash-out refinance can be helpful. The trade-off is that you restart your primary mortgage term, and fees are generally higher. However, if your home equity financing was used only to purchase or improve your home, you may qualify for a limited cash-out refinance with lower fees and LTVs as high as 97%.
How to refinance a home equity loan
Refinancing a home equity loan can involve some key steps:
1. Determine your refinancing goals
Before applying, identify what you want to accomplish by refinancing your home equity loan. You may want to lower your monthly payment, try to qualify for a larger HELOAN or consolidate your first and second mortgages into a new home loan, such as a 30-year fixed mortgage or 15-year fixed mortgage. Having a clear goal can make it easier to compare loan offers and find the right fit for your unique financial needs.
2. Review your finances and eligibility
Loan providers evaluate several key factors before approving a refinance application, including your credit score, income, debt-to-income (DTI) ratio and the amount of equity you have in your home. Reviewing your finances beforehand can help you understand whether you’re likely to qualify and identify areas you may want to improve before applying, such as paying down high-interest debt or correcting errors on your credit report.
3. Research and compare mortgage lenders and loan offers
Besides refinancing your existing home equity loan, you may also be able to switch to a HELOC or pursue a cash-out refinance, which affects your primary mortgage, too. These are all important options to compare. To help you decide, consider shopping around multiple mortgage lenders to review interest rates, annual percentage rates (APRs), repayment terms, closing costs and other fees. Even small differences in rates or fees can affect the total cost of borrowing, so comparing offers can help you find the loan that aligns with your goals.
4. Gather documents and submit your application
Once you’ve chosen a lender, go through their application process. Depending on your employment status, required documentation may include recent pay stubs and W-2s, or tax returns and profit-and-loss statements if you’re self-employed. Prepare as many documents as you can in case there are follow-ups.
Lenders may also ask for bank or investment statements to verify your assets, as well as information about your liabilities (credit card balances or outstanding loans). In addition, you’ll typically provide details about your existing home equity loan and your property. Some lenders may require a home appraisal to determine the current market value of your home.
5. Review your loan term and close on the refinance
Before closing, carefully review your Loan Estimate and Closing Disclosure so you understand your interest rate, monthly payment, closing costs and repayment schedule. If you decide to move forward, you’ll sign the closing documents, and your existing home equity loan will be paid off. After closing, you’ll begin making payments based on the terms of your new financing product.
Pros and cons of refinancing a home equity loan
As you consider moving forward with the process, weigh several potential pros and cons.
Pros of refinancing a HELOAN
- Opportunity for a lower interest rate (check current mortgage rates here)
- Flexibility to adjust loan terms
- Ability to consolidate debt at a lower cost
- Access to additional funds for major expenses
- Potential to move from variable to fixed rate for stability
Cons of refinancing a HELOAN
- Closing costs and fees
- Extending your loan term could mean paying more interest long-term
- Qualification requirements may be stricter than when you first applied
- Risk of foreclosure if you can’t keep up with payments (because your home is collateral)
- Market conditions (like rising rates) could limit the financial benefits
In summary
Refinancing a home equity loan can help lower your monthly payments, adjust your terms or provide access to additional funds. However, it’s not the right choice for everyone. There are advantages and drawbacks, as well as your own financial goals to consider. The benefits of refinancing a home loan or home equity product are influenced by market conditions. Speaking with a financial professional can help you decide if refinancing is a smart move for your personal situation.
