Can You Refinance a Home Equity Loan? Key Knowledge To Help You Choose

house made of currency in a hand representing can you refinance a home equity loan

Can You Refinance a Home Equity Loan? Here’s Everything You Need to Know

If you’re in desperate need of income and you’re sinking in debt, loan refinancing may be the lifeline that saves you. There are lots of loans you can refinance, but can you refinance a home equity loan? couple standing together holding white board with a house drawn on it

No matter how conscientious you think you’re being when it comes to managing your money, sometimes, life gets in the way.

Whether you’ve had a medical emergency, a job loss, or another major event and are strapped with debt as a result, being desperate for additional income is never a good place to find yourself.

Being stuck in this situation often causes many people to wonder, “Can you refinance a home equity loan?”

The short answer to the question is that, yes, you can — at least in most cases. But, that doesn’t necessarily mean that this is the best approach for everyone.

Read on to learn more about refinancing home equity loans, how to go about it, and how to decide if it’s the right choice for you.

What is Refinancing?

First things first, let’s clarify what happens when you decide to refinance mortgage home equity.

When you refinance home equity loans — or any type of loan, for that matter — you can get a lower interest rate and, therefore, a lower monthly payment. This could be a great option for people who are looking to decrease their spending and stay on top of their finances.


Watch This Short Howcast Video About The Home Equity Refinance Process


 

Benefits of Refinancing

There are a number of benefits that come with refinancing a home equity loan, including the following:

  • Lower interest rates
  • Opportunity to switch from an adjustable rate loan to a fixed rate loan
  • Obtain a shorter-term extension to start building new equity
  • Avoid balloon payments (a larger-than-usual payment at the end of your loan term)
  • Extract more cash from the capital you’ve accrued

Many people are enticed by these benefits. But, it’s important to remember that there are also some risks that come with refinancing your home equity loan.

Risks of Refinancing

Some risks that you need to take into account before refinancing include:

stacks of coins next to wooden house

  • Potential to lose your home and investment if you can’t make the new payments
  • Potentially owing more than your residence is worth if it declines in value
  • Closing costs and additional fees that may affect your monthly payment

It’s also important to note that not everyone is eligible to refinance. If you currently owe more than your place is worth, your application for a refinance will probably be denied.

How Can You Refinance a Home Equity Loan?

If you’ve weighed the risks and benefits and have decided that refinancing is your best bet, there are a couple different approaches you can take.

Cash-Out Refinance

Your first option is a mortgage cash-out refinance. When you take this approach and your new loan closes, a portion of the proceeds will go to paying off the first mortgage. The cash-out portion will allow you to pay off your original home equity loan.

Some people are also able to pocket additional money if they have enough equity.

The following people are most likely to benefit from a cash-out refinance:

  • Those who want to turn variable-rate credit into a fixed-rate loan
  • People who want to lower their interest rates
  • Those who have FHA loans but now qualify for loans with better terms

Only certain people are eligible for cash-out refinancing. You’ll need to have owned your house for at least six months. You’ll also need to have accrued a certain amount of equity.

puzzle of one hundred dollar bill

There should be enough to pay off the principal balance of the first mortgage, pay off what you owe on the home equity loan, and maintain a 20 percent stake in the home.

Cash-out refinancing is also only available to those with a credit score of 640-680 or higher.

Refinance into a New Loan

Another option is to refinance into a new home equity loan. This is a good option for the following people:

  • Those who are happy with the terms of their first mortgage
  • Consumers who want to borrow more money to cover additional expenses
  • Those who want to get a longer loan term to decrease the size of their monthly payments

There are fewer eligibility requirements for those looking to refinance into a new loan. Those who want to take this approach need a credit score of at least 620 (although the best rates typically go to those with scores of at least 740).

In most cases, the lender will pay the majority (if not all) of the closing costs associated with a new home equity loan. But, if you close the loan early, you’ll have to reimburse them for these costs (usually anywhere from several hundred to a several thousand dollars).

Additional Tips for Refinancing

How can you refinance a home equity loan with confidence when you may be missing the information you need?

If you think refinancing is for you but you’re still feeling a little lost or overwhelmed, these tips may help you solidify your decision and feel confident that you are getting the greatest benefits from the new loan. information tips icon

Know Your Loan-to-Value Ratio

Take some time to sit down and figure out how much equity is currently available. Then, compare that amount to the size of the loan.

Generally speaking, the more equity you have compared to the size of the loan, the better.

Establish Your Borrowing Needs

Figure out what your specific reason for borrowing additional money is. Then, determine how much cash you’ll need to accomplish that goal. You’ll also want to ensure there’s enough equity in your dwelling to cover this additional borrowing.

Set Realistic Goals

When you take out a new loan, you get to reset payment terms and the number of monthly payments you’ll make. Choose a loan that works well with your current needs and financial situation.

Keep in mind, too, that interest rates will generally be lower on short-term loans and loans that carry a variable interested rate.

Take Closing Costs into Account

Estimate potential closing costs and additional fees that come with refinancing your home equity loan and do the math. If these fees will offset your monthly savings, refinancing probably isn’t your best option.

Know Where You Stand

It’s also important to take a good look at your financial situation. Check your credit score before applying for a loan. That way, you’ll know right away if you qualify and won’t be caught off guard.

Looking for More Financial Advice?

You now have an answer to the question, “Can you refinance a home equity loan?”

Are you in need of additional financial advice? Do you just want to improve your money management skills?

Either way, we’ve got all the answers you need. Subscribe to get our free ebook today so you can learn how to improve your credit.

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4 Comments

  1. Sometimes getting behind on bills can affect your credit score as well. Making the situation worse.

    The refinancing options you have shown are great for someone with decent to good credit.

    However what about those who have significant debt and it has lowered their credit score to below 620?

    Are there any options out there that you know of to refinance with those types of scores? For people who have a decent amount of equity in their home and have never missed a house payment?

    • Hi Maryann – You are quite right.  Erratic creditor payments can get you in a bind.

      It’s going to be tough to get a home equity loan with a score below 620.  A decade ago it might be easier, but with more stringent lender guidelines these days, it’s a tough row to hoe.  

      Generally you’ll need a minimum score of 640 – 680 and a debt to equity ratio of 41% to qualify.

      I’d work on improving your score if you can by getting your bills paid up.

      I know that’s easier said than done. However, if you sit down and look at all the things you are spending your money on, you may be able to find some savings in places you never considered.

      Finding a side gig to earn extra money could also be an avenue to explore.

      Have a look at this article here. It may help provide some additional guidance.

      Improve Your Credit Score

      Thanks and best of luck.

  2. It was very helpful to know the pros and cons of refinancing a home equity loan. I’m considering a refinance, but I want to make sure I am making the right decision.

    Impulsive decisions can lead to a devastating outcome to your finances if not handled properly.

    Thanks for the informative article.  It has helped me understand what I am up against.  After reading this article I believe I can make a more informed decision. 

    • Thanks for your comment.

      Refinancing doesn’t need to be a difficult process you just need to be able to qualify.  If you qualify and you have all the facts at hand, then you can make the right decision.

      The goal in refinancing a home equity loan is to lower your payments and free up cash for emergencies or targeted spending like home improvement or buying a new car.

      You can also use it to pay down other debt like credit card or student loan debt.

      Shop around at a local community bank or credit union.  They are in the business of helping their customers and members.  I think you will find that they can help you in making the right decision.

      All the best.

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