Can I Refinance a Home Equity Loan?

Can you refinance a home equity loan? It’s a question many homeowners have no doubt asked themselves, especially given the popularity of home equity loans and home equity lines of credit (HELOCs) for many families.

Home equity loans and HELOCs are financial tools that allow you to adjust payment terms related to your home or draw on the equity in your home to help pay for repairs or home improvements. But it’s not uncommon to want to refinance a home equity loan. You can refinance a home equity loan. And depending on your circumstances, it’s often highly recommended.

A home equity loan is a fixed-term loan secured by a homeowner’s home and is a type of second mortgage. A homeowner applies for a set amount of funds. If the lender grants the request, they receive the approved amount as an upfront lump-sum payment with a fixed interest rate and schedule of payments that applies over the life of the loan. A lender provides the loan based on the equity in your home (the difference between your home’s value and your outstanding loan balance).

A HELOC is a revolving line of credit that lets you borrow against the equity in your home, and you repay the money over an extended period. A HELOC works like a credit card. Borrowers can tap into their credit line up to a preset limit.

A cash-out refinance is another way to access home equity. With a cash-out refinance, you can replace your existing mortgage with a new mortgage with new payment terms and convert your home equity into cash you can use for many purposes.

If you want to tap into the equity in your home to fund home improvements or upgrades with a home equity loan, HELOC or cash-out refinance, budget accordingly to prepare for financing terms, monthly payments and associated closing costs.

Applying for a home equity loan or HELOC can mean taking on the additional risks of a second mortgage and associated payments. However, it’s not uncommon to want to refinance a HELOC or a home equity loan when the opportunity to secure a better interest rate or a more favorable payment method presents itself. Refinancing a home equity loan can often help you stay more cash flow positive and better positioned to meet monthly payment obligations.

While it’s possible, it isn’t customary to use a home equity loan to refinance your existing mortgage, primarily because the process only makes financial sense for homeowners with a lot of equity built up in a home. If you got a mortgage when interest rates were relatively high, and then they dropped, and you have a great deal of equity in your property, refinancing with a home equity loan may be a worthwhile financial lifesaver.

As with any real estate transaction, refinancing a home equity loan has advantages and disadvantages:

Pros

• Opportunity to capitalize on lower interest rates
  
  
• Opportunity to transition from adjustable-rate to a fixed-rate mortgage
  
  
• Opportunity to gain more working capital for home improvement and other projects
  
  
• Opportunity to lower monthly payments and adjust repayment terms

Cons

• Takes time and money to obtain and is secured by your home
  
  
• Homeowners assume additional risks and additional payments
  
  
• May obligate homeowners to a longer payment term

Refinancing a home equity loan is similar to obtaining a mortgage. Like the mortgage application process, you’ll provide detailed financial documentation, including tax returns and pay stubs, and information about the home and any related paperwork. It helps to have a higher credit score and a favorable debt-to-income ratio (DTI) to get the best interest rates on a home equity loan refinance.

To refinance a home equity loan, you must guarantee the transaction with your property and have enough equity in your home. Your lender will consider all loans and mortgages taken out against the property. Most lenders will require a combined loan-to-value ratio (LTV) under 90%. In other words, your total outstanding mortgage balances can’t exceed 90% of your home’s total value.

As a general rule, refinancing a home equity loan can help a homeowner secure lower interest rates and payments, and they may be able to adjust loan repayment terms and extend their repayment period. You can use it to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan (and vice versa) or use the funds for savings or home repairs and improvements.

It’s generally best to wait to refinance until you’ve built up a significant amount of equity in your home or interest rates have dropped since your first home loan.

If a cash-out refinance makes sense for your needs, speak with a Home Loan Expert today at Rocket Mortgage®.