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Home equity loans allow you to turn your home’s equity into cash, and they’re a popular way to cover the costs of home improvements, medical bills, college tuition, and other large-sized expenses.
But interest rates on home equity products are always in flux, and there might come a time when rates fall below your current rate. If this happens, it might be smart to refinance your home equity loan to take advantage of that lower rate.
Here’s when you might want to refinance your home equity loan and the pros and cons of doing so:
- When to refinance a home equity loan
- What to consider before refinancing your home equity loan
- Refinance today
When to refinance a home equity loan
Refinancing your home equity loan can be a smart move in many scenarios.
You might consider refinancing your home equity loan when:
- Average interest rates are lower than the rate on your current loan. Locking in a lower rate would lower your monthly payment and reduce your long-term interest costs.
- You need a lower payment. You might refinance into a longer-term loan, thus spreading your payment over more months and lowering your monthly costs.
- You have an adjustable-rate loan and your rate may be increasing soon. If there’s a chance the interest rate on your adjustable-rate home equity loan will soon rise, you might consider refinancing into a fixed-rate loan to keep your payments consistent and affordable.
- You want to pay off your loan sooner. If you’ve gotten a raise or just want to pay off your loan faster, refinancing into a shorter-term loan can help you do it. Just keep in mind that it will require larger monthly payments.
- You need more cash. If you want to take out more funds, refinancing may be able to help.
- You want to avoid a balloon payment. If your current home equity loan comes with a balloon payment (a lump-sum payment that’s due at the end of your loan term), then refinancing might also be a smart move to consider if you want to avoid it.
What to consider before refinancing your home equity loan
Before you can determine if refinancing your home equity loan is the right path forward, you’ll need a good grasp on the financials of it all.
First, take your home value and subtract your existing loan balances. That’s how much additional equity you could tap through refinancing.
You’ll also need to determine what you could realistically afford — both monthly and upfront, and have a solid handle on your goals for the refinance. This will allow you to evaluate whether refinancing is a good opportunity or not. You should also be aware that state law or lender restrictions might not allow you to borrow against all of the equity in your home.
Benefits of refinancing a home equity loan
Refinancing offers quite a few benefits when the situation is right. It could help you:
- Get a lower monthly payment: Refinancing into a loan with a lower interest rate or longer term can help you do this.
- Pay less interest over time: If your new loan has a lower interest rate or a shorter loan term, you’ll pay less in interest costs in the long run.
- Switch to a quicker payoff period: Refinancing to a shorter-term loan can let you pay off your loan sooner.
- Get access to more cash: If you need more money than your current home equity loan will afford you, you can refinance into a larger loan to help.
- Avoid a jump in payments: Refinancing to a new loan can help if your current loan has an adjustable interest rate or there’s a balloon payment pending.
Risks of refinancing a home equity loan
A home equity loan refinance isn’t without risks, though. Keep in mind that:
- You’re putting your home on the line. Since home equity loans use your property as collateral, if you fail to make your payments, you could lose your home.
- You might owe more than your home is worth. There’s also the chance you might owe more than your home is worth. This could happen if you have a lot of debt secured by your home relative to your home’s value and home values decline in your area.
Cost to refinance your home equity loan
Refinancing your mortgage comes with some added costs — and home equity loans are no different.
The exact costs of your refinance will depend on your lender, as well as what you qualify for given your credit score, income, and available equity. Generally, though, you can expect closing costs to clock in somewhere between 2% and 5% of your loan amount. This might include an application and appraisal fee, the costs of your title search, and other fees associated with underwriting and closing your loan.
In some cases, you may be able to finance many of the closing costs that come with your refinance.
If you’re looking to refinance your mortgage or home equity loan into a conventional mortgage, Credible Operations, Inc. can help. You can compare prequalified rates from multiple lenders at once in just a few minutes.