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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:
- Can you refinance a home equity loan?
- Reasons to refinance a home equity loan
- Drawbacks to refinancing a home equity loan
- Should you refinance your home equity loan?
Can you refinance a home equity loan?
Yes, you can refinance a home equity loan, just as you can any other type of mortgage.
To do this, you’d apply for a new home equity loan (with your current lender or another — whichever has the best rates), and then use the new loan to pay off the old one.
Ideally, the new loan would come with a lower interest rate, a lower monthly payment, or access to more cash.
In this scenario, you’d use the new loan to pay off your primary mortgage and the cash-out portion to cover your home equity loan balance.
Requirements for refinancing a home equity loan
You’ll need to meet certain financial requirements in order to refinance. Though the exact standards will vary from one lender to the next, you’ll generally need the following:
- Debt-to-income ratio lower than 43%
- At least a 680 credit score
- A variety of documentation, including your photo ID, and recent W-2s, tax returns, and bank account statements.
Finally, your home’s loan-to-value ratio will also play a role — especially if you’re looking to access more cash. For this reason, your lender may order an appraisal to assess the value of your property.
Check Out: When to Refinance a Mortgage: Is Now a Good Time?
Reasons to refinance a home equity loan
Though most homeowners refinance their home equity loans to save on interest or reduce their monthly payments, there are other reasons you might want to do it too.
Here are a few reasons you might want to consider refinancing:
- Lower your monthly payment: Refinancing into a loan with a lower interest rate can reduce your monthly payment. You could also opt for a longer-term loan, which would spread your payments out further and lower your balance even more.
- Switch from an adjustable-rate to a fixed-rate loan: If you have a home equity loan with an adjustable-rate, then your interest rate could very well rise soon, sending your monthly payment up with it. Refinancing into a fixed-rate loan can help you avoid this.
- Change your loan term: You can also use a refinance to switch the term — or length — of your loan. Switching to a longer-term loan (from a five-year to a 10-year term, for example) would lower your monthly payments and allow you to pay off the loan over a greater period of time. Refinancing into a shorter-term loan (from 10 years to five) would mean a higher payment but a shorter payoff timeline.
- Take more cash out of your home: If you need more cash for renovations, repairs, or any other cost, then refinancing to a higher-balance loan can help you do it. Keep in mind this will also raise your payments.
If you’re hoping to save on interest or reduce your payments by refinancing, make sure you shop around. Credible can help you compare rates from our partner lenders. Our process is safe and simple — you can see prequalified rates in as little as three minutes, and you don’t even have to leave our platform.
Find My Refi Rate
Checking rates will not affect your credit
Drawbacks to refinancing a home equity loan
Refinancing your home equity loan isn’t without fault. For one, you’re putting your house on the line — and that’s always a risk you shouldn’t take lightly.
If you’re considering a home equity refinance, factor in these risks first:
- You’re using your home as collateral. Home equity loans use your home as collateral, so make sure you’re absolutely comfortable with your new payment. Defaulting on your loan could mean losing your home altogether.
- You could end up owing more than your home is worth. If home values decline in your area, you might owe more on your two mortgages than the house is actually worth. This is called being “upside down” on your mortgage and could cause a problem if you need to sell or fall on hard times.
- The refinance won’t come for free. Refinancing comes with various fees and closing costs, so you’ll need some cash in the bank in order to move forward. You should also ask your existing lender about any prepayment fees that could add to your bill as well.
Learn More: HELOC vs. Home Equity Loan: How to Decide
Should you refinance your home equity loan?
Clearly, there are both pros and cons to refinancing a home equity loan. While it can help you lower your payment or take more cash out of your home, using your home as collateral does come with risks.
Ultimately, the right choice depends on a lot of factors. If you’re looking to access more cash, then you’ll need to determine how much you can pull out — that is, your current home equity.
$250,000 – $100,000 – $50,000 = $100,000
Keep in mind, though, that many lenders won’t allow you to tap the full value of your home, so it may be even less than this.
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.
Finally, understanding your lender’s requirements for the loan, as well as what interest rate you may be eligible for, is also critical. Credible can help you with this. Simply enter your information in the table to see what rates you prequalify for.
