Can You Refinance a Home Equity Loan?
If you’ve had a home equity loan for a while and want to reduce your monthly payments, you might be wondering: Can you refinance a home equity loan?
You can indeed refinance a home equity loan. However, you’ll need to make sure you understand the costs and eligibility requirements first. We’ll cover both how to refinance a home equity loan and what to consider before you make the decision.
A home equity loan is a convenient way for homeowners to access cash in a lump sum at a relatively low interest rate, as compared to personal loans and credit cards. The loan is repaid in monthly installments over a set term of five to 30 years, and rates are typically fixed.Home equity loans let you borrow against the value of your home, giving you a way to convert the equity you’ve built into cash. You can use those funds to make home improvements, pay college expenses, consolidate debt or fulfill any other purpose you choose.
The interest rate on a home equity loan is typically higher than that of a first mortgage, which is the loan you took out to purchase your home. That’s because first mortgages take priority over home equity loans when debt is repaid in a foreclosure sale. Thus, home equity loans are riskier for lenders than first mortgages are.
See today’s home equity loan rates on LendingTree.
Can you refinance a home equity loan into a mortgage?
Yes. You have two options when refinancing a home equity loan:
- You can refinance it into a mortgage using a cash-out refinance. This is a new loan that also replaces the mortgage you used to buy the house. Because it has a larger loan amount than the existing loan, you’ll get to take the difference in cash.
- You can refinance a home equity loan without refinancing your mortgage by simply applying for a new home equity loan. Or you can choose to refinance the home equity loan using a home equity line of credit (HELOC), another second mortgage option that’s similar to a home equity loan but with some key differences (we’ll cover those later).
Unsure which option is best for you? Read our comparison of cash-out refinances vs. home equity loans. vs HELOCs.
How often can you refinance a home equity loan?
There’s no specific limit on how frequently you can refinance your home equity loan, but you may be limited by lenders’ restrictions and requirements — for example, a waiting period between refinances or a minimum amount of equity that must be maintained.
How to get equity out of your home without refinancing
You can get equity out of your home without refinancing by taking out a home equity loan or HELOC. Both options allow you to borrow against the equity in your home, typically at interest rates lower than personal loans or credit cards. Unlike refinancing, these options provide you with additional funds while keeping your original mortgage intact.
When does it make sense to refinance a home equity loan?
Reasons to refinance a home equity loan include:
- Your credit profile has improved. Perhaps you paid off a few credit card balances or an auto loan and your credit score increased. This puts you in a good position to grab a lower interest rate and monthly payment if you get a new home equity loan.
- You want to change your loan terms. Extending your loan term will cut down your monthly payment amount, while shortening your term will allow you to save on overall interest charges and pay off your loan sooner.
- You want to lock in a lower interest rate. The average interest rate offered on the LendingTree platform for a $50,000 home equity loan is 6.63%. If your current home equity rate is significantly higher, you could benefit from a refinance.
- You want to borrow more equity. If you didn’t initially borrow the maximum amount of equity allowed, or if you’ve built up significantly more equity in your home, a new loan could help you access more.
- You’d rather have the flexibility of a HELOC. HELOCs are similar to home equity loans — but instead of offering you a lump sum at a fixed interest rate, they give you access to a line of credit at a variable rate. You can use, pay off and reuse the credit as many times as you’d like for a set period of time — a big perk for those with ongoing expenses.
Learn more about home equity loan terms.
Costs to refinance a home equity loan
It’s important to plan for the closing costs on a home equity loan, HELOC or cash-out refinance, which can range from 2% to 6% of the loan amount. Closing costs can include:
- Loan origination fee
- Home appraisal fee
- Credit report fee
- Title search fee
- Document preparation fees
- Lawyer and notary fees
Some lenders offer no closing cost loans, but you’re usually required to take a higher interest rate as part of the deal. That, along with the increased loan amount, means you’ll pay more in total interest.
Pros and cons of a home equity loan refinance
| Pros | Cons |
|---|---|
Total interest savings. Locking in a lower interest rate or reducing your loan term can save you a lot of money in interest. Monthly payment savings. A lower interest rate can mean a smaller mortgage payment each month. Flexibility. You can use the funds for virtually any purpose, such as renovating your home, covering medical expenses or consolidating high-interest debt. Tax benefits. If you used the cash to “buy, build or substantially renovate” According to the IRS’s rules. your home, you can deduct any interest you paid on a home equity loan when tax time rolls around. | Risk of foreclosure. If you can’t keep up with your home equity loan, HELOC or first mortgage payments, you could lose your home. Vulnerability to falling home values. If home values in your area fall and you’re carrying a large home equity loan balance, you could end up “underwater” on the loan. That means that you’d owe more than the home is worth. Closing Costs. Refinancing a home equity loan usually involves paying closing costs and fees, which can add to the total cost of the loan. Fees. Appraisal, origination and early closure fees are common with a home equity loan refinance. And if you choose to refinance using a HELOC, be on the lookout for annual membership or transaction fees. |
How to refinance a home equity loan
- Assess your finances. Review your current home equity loan and overall financial picture to determine if refinancing could offer better rates or terms. Consider your financial goals and how refinancing fits into them.
- Decide on a loan type. Once you know your loan options, you’ll need to decide which one best fits your needs. A cash-out refinance is a good option if you can benefit from altering your current home loan, while second mortgages let you refinance your home equity loan without touching your primary mortgage.
- Comparison shop. Research at least three to five lenders to compare interest rates, terms and fees for refinancing a home equity loan. Don’t forget to check with your current lender, as they might offer competitive refinancing options to retain you as a customer.
- Apply for the refinance loan. Choose the lender that offers the best terms for your situation and submit an application. You’ll need to provide documentation of your income, home appraisal and current loan details. Be prepared for the lender to conduct a thorough review of your financial history and credit score.
- Close on the loan. Once you’re approved, your lender will give you documents to review that spell out your new loan terms. In order to finalize the deal and close on the refinance, you’ll have to pay your closing costs and any other upfront fees.
Qualifying to refinance a home equity loan
- Equity: 15%
You’ll need to have equity available to borrow from, but you can’t borrow the full amount — lenders typically limit your borrowing to 80% to 85% of your home’s equity. For example, if your home is worth $300,000 and you owe $125,000 on your mortgage, you have $175,000 in available equity. However, the maximum you’d be able to borrow is $148,750.
- Credit score: 620 or higher
Credit score requirements vary by lender and could be more strict than some minimum mortgage requirements. For a cash-out refinance, you’ll need at least a 640 credit score.
Many lenders require a minimum 620 credit score for home equity loans or HELOCs, but that can go up based on the amount you want to borrow. Generally, the higher your LTV ratio, the better your credit score needs to be.
- LTV: 80% or less
Your loan-to-value ratio is calculated by taking the loan amount secured by your home and dividing it by your home’s appraised value. Most cash-out refinance lenders set an 80% maximum for your LTV.
If you opt for a second mortgage rather than a cash-out refinance, you’ll need to look at a special version of LTV known as your “combined” LTV (CLTV). It’s wise to aim for a maximum CLTV ratio of 85%, though some lenders may allow a 90% to 100% CLTV. (Your CLTV is calculated by taking the balances of your first mortgage and home equity loan added together, then dividing by your home’s value).
- DTI: 43% or less
Your debt-to-income (DTI) ratio is the percentage of your gross monthly income used to make monthly debt payments, and lenders use this number to assess how heavy a debt load you’ll be under once you take on the new loan. Most lenders prefer that your DTI not exceed 43%.
Is a home equity loan refinance right for you?
A home equity loan refinance could save you money and provide some relief to your monthly budget. Take these steps to make sure it makes good financial sense before you proceed.
→ Consider whether you plan to stay in your home long enough to reach the break-even point. Calculate your break-even point, the amount of time it would take you to recoup the costs you paid for your home equity loan refinance. Make sure it aligns with your life plans, otherwise your refinance could end up hurting you rather than saving you money.
→ Look at your monthly budget. Although you may be able to qualify for a home equity loan refinance, you can’t let lenders decide what you can afford. Take inventory of your monthly budget and determine if you really have room for all of the costs and fees associated with refinancing your home equity loan.
Have a home equity line of credit? Here’s what you should know about refinancing a HELOC.