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?
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:
- 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.
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.
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.
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?
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