Home Equity Loan Refinance: When to Do It and How to Get Started
Bills Bottom Line
Yes, you can refinance a home equity loan. You have three options: replace it with a new home equity loan, swap it for a HELOC, or fold it into a cash-out refinance. Each path has trade-offs. The right one depends on your rate, your equity, and what you need the money for.
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Your home equity loan felt like the right call when you took it out. Now the terms are not working as well as you'd like. Rates have shifted, your needs have changed, or the payment is higher than expected. But you're not stuck.
Refinancing a home equity loan means replacing your current second mortgage with a new one on better terms. There is more than one way to do it.
Here is how to figure out which option fits.
Can you refinance a home equity loan?
Yes. A home equity loan can be refinanced, just like a primary mortgage. You replace your existing loan with a new one, usually from a different lender, at better terms.
You may be eligible to refinance if you meet your new lender's requirements for equity, credit, and income. Requirements vary by lender.
One thing to know: refinancing a home equity loan leaves your first mortgage untouched, unless you choose the cash-out refinance path.
Three ways to refinance a home equity loan
You have a few paths here:
- New home equity loan. You replace your existing home equity loan with a new one at a fixed rate. Your first mortgage stays in place. Choose this if you want better terms on the second loan without touching your primary mortgage.
- Home equity line of credit (HELOC). Instead of a lump sum, you get a revolving credit line to draw from as needed. HELOC rates are typically variable, meaning your payment can shift with the market. Choose this if you need ongoing access to funds rather than one fixed amount.
- Cash-out refinance. This replaces both your first mortgage and your home equity loan with one new loan. You get one payment instead of two. Choose this if your first mortgage rate is also high, or if consolidation is the goal. The trade-off: you restart your primary mortgage term, and fees are generally higher. However, if your home equity financing was only used to purchase or improve your home, you can wrap it into a "limited" cash-out refinance with lower fees. Another advantage of limited cash-out refinancing is that maximum LTVs can be as high as 97%.
The best choice depends on your rate, your timeline, and whether you need cash all at once or over time.
| Home Equity Loan | HELOC | Cash-Out Refinance | |
|---|---|---|---|
| What it is | Installment loan | Revolving credit line | Installment loan |
| Interest rate | Usually fixed | Usually variable, sometimes fixed | Usually fixed, sometimes adjustable |
| Replaces primary mortgage? | No | No | Yes |
| Typical costs | Moderate closing costs | Lower upfront fees, possible annual fees | Higher closing costs |
| Best use | Refinance HEL at lower rate | Ongoing expenses | Consolidate mortgages and/or a lower mortgage rate |
A note on taxes: Interest on a home equity loan may be tax deductible if the funds are used to buy, build, or substantially improve the home that secures the loan. If used for other purposes, such as debt consolidation, the interest is generally not deductible. Consult a tax advisor for your specific situation.
What you need to qualify for a home equity loan refinance
Requirements are pretty similar no matter which path you take to refinance. Most lenders look at four things:
- Home equity. Lenders typically require you to retain at least 15% to 20% equity after the refinance. That means a combined loan-to-value (CLTV) ratio of 80% to 85% or lower.
- Credit score. Most mainstream lenders look for a credit score of 600 or higher.
- Debt-to-income (DTI) ratio. Lenders typically prefer a DTI at or below 43%.
- Income documentation. You usually need to provide recent pay stubs and two years of tax returns.
Lenders may also review your payment history on your existing loan. Requirements vary by lender. Confirm the specific criteria before you apply.
When refinancing a home equity loan makes sense (or not)
Refinancing costs money upfront, so the decision comes down to whether the long-term savings justify the cost. Here are the situations where it could make sense—and where it typically doesn't.
When it could make sense
- Rates have dropped at least 1% since you took out your original loan. That gap may be enough to offset closing costs and generate real savings.
- Your home has gained value, giving you more equity and potentially better terms.
- You have a variable-rate loan and want a predictable fixed payment.
- You want to consolidate your first mortgage and home equity loan into one payment at a lower combined rate. Especially if you qualify to do a limited cash-out refi.
When it likely doesn't
- You plan to sell within the next few years. Closing costs typically run 2% to 5% of the loan amount, and it takes time for interest savings to make up for those fees.
- You are close to paying off the loan. Refinancing could reset the clock and add total interest, depending on the term you choose.
- Your home value has dropped. You may not meet most lenders' equity requirements.
Whichever path you take, remember one important thing: Your home serves as collateral for any home loan. If you can’t repay the loan, the lender could foreclose on your home. Always have a repayment plan before you take out a mortgage.
Bills Action Plan
- Compare your current home equity loan rate to today's rates. If the gap is less than 1%, closing costs may outweigh the savings. Use the home equity loan calculator to model your numbers.
- Calculate your CLTV: add up your primary mortgage and your home equity loan balances. Then divide by your home's current market value. If you have a $500k home, a $350k first mortgage and a $50k second mortgage (totaling $400k), you'd divide $400k by $500k to get 80%.
- Pull your free credit report at AnnualCreditReport.com and check for errors before applying. You can also check your credit score for free at Experian or Equifax. Errors could affect the rate you are offered.
Key Terms
CLTV (combined loan-to-value): All loans on your home divided by its current market value. A CLTV of 80% means you owe 80% of the home's value across all loans.
DTI (debt-to-income): Total monthly debt payments divided by gross monthly income. Lenders use this to assess repayment risk.
Second mortgage: A loan secured by your home in addition to your primary mortgage. Home equity loans and HELOCs are usually second mortgages.
Cash-out refinance: A new, larger first mortgage that replaces your primary mortgage and gives you cash from your equity. You can use the cash-out to pay off your existing home equity loan. Unlike a home equity loan, it eliminates your original mortgage entirely.
Limited cash-out refinance: A refinance that includes closing costs and/or home equity loan payoff, when the home equity proceeds have been used to purchase or renovate the home. Loan fees are lower for limited cash-out refinances than cash-out refis, and maximum LTVs can be much higher.
How long does it take to refinance a home equity loan?
The process typically runs from a few weeks to about two months, depending on the lender, your documentation, and whether an appraisal is required. After closing, there is a mandatory three-business-day waiting period before funds are disbursed. This is your right of rescission under federal law, giving you time to reconsider before the loan takes effect. Ask your lender for a timeline estimate before you apply.
Can you refinance a home equity loan into your primary mortgage?
Yes, through a cash-out or limited cash-out refinance. This replaces your first mortgage with a new, larger loan and pays off your home equity loan at closing, leaving you with one monthly payment. Fees are generally higher for cash-out refinancing, so compare total costs before deciding. See our guide to cash-out refinance for more detail.