Summary
- Refinancing a home equity loan can lower your interest rate, reduce monthly payments, and increase your monthly cash flow — but it comes with closing costs, extended loan terms, and potentially facing challenges in meeting lender eligibility criteria.
- Eligibility for refinancing a home equity loan requires meeting specific criteria. Lenders typically require a minimum credit score of 640, stable and sufficient income to manage debt payments, proof of assets as reserves, and an appraisal of your home.
- The refinancing process involves a multi-step procedure that typically takes between two to six weeks.
If you have a home equity loan, it’s possible to refinance it. This is done by getting a new home loan and using it to pay off the old one.
Refinancing a home equity loan can be beneficial because it can lower your interest rate, reduce your monthly payments, and increase your monthly cash flow. However, doing so typically means you’ll have to pay closing costs. You’ll also be required to meet a lender’s eligibility criteria, so not everyone will qualify.
Find the best way to unlock your home equity
House Numbers helps you access your home equity to pay off debt, fund home improvement, or general expenses.
Read on as we’ll help you determine whether refinancing a home equity loan is right for you and, if so, how to get the process started. Since this requires you to tap into your home equity, House Numbers can also help you find the best way to access your home equity, all at no cost, with no obligation, and with no impact on your credit score.
What is a home equity loan and is it the same as a home equity line of credit?
A home equity loan is a second mortgage on your home. It uses your property as collateral, which gives the lender the ability to foreclose should you default on the loan. Home equity loans typically have a fixed interest rate and are an additional monthly payment on top of your existing primary mortgage loan.
A home equity line of credit (HELOC) is a type of home equity loan. A HELOC gives you the flexibility to draw funds on an as-needed basis up to your designated credit limit. As you pay down the balance, you can continue to draw additional funds. Interest rates tend to be variable, however, so your monthly payments could fluctuate over the life of the loan.
What are the benefits of refinancing a home equity loan?
You can save on interest charges
By getting a new home equity loan with a lower interest rate, you can save on the total amount of interest charges you’ll pay over the life of the loan. Before you do this, however, make sure to account for any closing costs associated with refinancing your loan. We also recommend using a mortgage payment calculator to determine your break-even point, as well as finding out the total interest charges you’d be paying on the new loan.
You can lower your monthly payment
By refinancing your home equity loan, you can not only get a lower interest rate, but you can also extend your loan repayment term. Both of these can help lower your monthly payments and increase your monthly cash flow.
You can get a fixed interest rate instead of a variable rate
If your current home equity loan has a variable interest rate, refinancing it with a fixed-rate home equity loan can eliminate the possibility of an ever-changing loan payment amount. With a fixed-rate loan, your monthly loan payment will not fluctuate, which can make it easier for you to manage your finances.
You can get additional cash with a larger loan amount
Just like a cash-out refinance on a first mortgage, you can request a larger amount of loan to pay for things like home improvements, repairs, or other expenses. When your existing home equity loan is paid off, the remaining funds can then be deposited into your bank account.
What are the downsides of refinancing a home equity loan?
You’ll need to pay closing costs
Getting a home equity loan typically means you’ll have to pay between 1% and 4% in closing costs. Much of this is to cover the lender’s cost of doing business in evaluating your risk level and eligibility for the loan. Examples of some costs the lender incurs and passes on to you include property appraisal fees and title searches to verify ownership of the home.
Note that while some lenders may not charge upfront fees, they may do so elsewhere. Some examples include annual fees and prepayment penalties.
You’ll be extending the loan repayment term
By refinancing your home equity loan, you’ll essentially be resetting the amount of time it will take for you to pay off the loan. As a result, while your monthly payments might be lower, you may end up paying more in interest charges over the life of the loan.
Some borrowers can have a more challenging time getting approved
Refinancing a home equity loan requires you to meet a lender’s eligibility criteria. This often involves various aspects of your credit score, credit history, income, employment, and property characteristics. Depending on the complexity and details of your loan application, you may not qualify, or the lender might need a significant amount of documentation to verify your eligibility for a new loan.
Find the best way to unlock home equity
What are the requirements to refinance a home equity loan?
To refinance your home equity loan, you’ll need to meet a lender’s requirements for a new home loan. While the exact qualifications will vary depending on the lender you choose, you’ll commonly be evaluated based on your credit, income, available assets, and property characteristics.
You can view our guide on the underwriting process for more details on each category, which we’ve summarized below.
Credit
Your credit score and credit history will be evaluated. Most lenders have a minimum credit score requirement of 640, but meeting this requirement does not guarantee approval. Details of your credit history will also be reviewed, which can include the amount of debt you’re carrying, recent applications for credit, the number and type of delinquencies, and more.
Income
Using your credit report, a lender will use your income to calculate your debt-to-income ratio (DTI). This is used as a measure of your ability to manage your debt payments and is calculated by taking your monthly debt payments and dividing it by your gross monthly income. If you have any concerns here, check out our tips on how to lower your DTI.
In addition to the amount and type of income you’re currently earning, your employment history will also be reviewed to determine its stability and likelihood of continuing.
Assets
Depending on the lender you choose, you may be required to provide proof of available assets as reserves. This is often done to strengthen a loan application and serve as proof that you can continue making payments in the event of a temporary interruption of your primary source of income.
Property
The amount of equity, condition, and value of your home are other critical factors that will determine whether you get approved for a new home equity loan. Lenders will request an appraisal of your home to determine its value, which will then be used to calculate your loan-to-value ratio (LTV). Properties must also typically be free of any health or safety hazards.
How do I go about refinancing my home equity loan?
Refinancing your home equity loan is a process that typically takes between two to six weeks. This amount of time is needed to verify your qualifications as well as the ownership status and condition of the property.
We’ve outlined each of the steps below, and you can head over to our guide on how long it takes to get a home equity loan for details.
- Apply and provide the required documents
- Lender orders third-party items (such as appraisals and titles)
- The loan goes through an underwriting review, after which a decision is issued
- If approved, a loan signing is scheduled
- Signed loan documents are reviewed by the lender
- The loan is finalized, and funds are disbursed to your bank account
Should I refinance my existing home equity loan?
If you’re wondering if you can refinance a home equity loan, the answer is yes. Whether it’s a good idea to do so will depend on your personal circumstances and goals. By refinancing your home equity loan, you can get a lower interest rate and reduce your monthly payments. You can also get additional funds, similar to a cash-out refinance. Since home equity funds can be used for nearly anything, you can also get additional funds for other purposes, such as paying for home improvements or consolidating debt.
However, refinancing a home equity loan will require you to pay certain closing costs, and getting approved is a process that could take several weeks. As always, before you sign anything, make sure you understand the pros and cons of home equity loans.
