- A home equity loan refinance may get you better loan terms.
- You don’t need to stick with your current lender to refinance a home equity loan.
- Home equity refinance rates and costs vary among lenders. Compare costs before committing to a new loan.
Can you refinance a home equity loan? You bet. But what is a home equity loan refinance, and why would you want one? This article covers home equity loan refinance basics and how to refinance a home equity loan.
Why Refinance a Home Equity Loan?
Home equity financing offers some of the lowest interest rates around, and the loans usually come with fixed interest rates and long repayment terms. However, your existing home equity loan might not be meeting all of your needs. Here are the most common reasons homeowners choose to refinance a home equity loan.
Home equity loan refinance for a lower interest rate
Getting a lower interest rate is one of the most common reasons to refinance a home equity loan. A lower rate might be available because interest rates have come down since you took out your loan or because you’re refinancing to a loan with a shorter term. (Loans with shorter terms are safer for lenders and carry lower interest rates.) Or, your home value or credit rating might have increased to the point that you qualify for a better interest rate.
Home equity loan refinance for more money
If you need a cash injection, you may be able to get a new home equity loan in addition to your primary mortgage and existing home equity loan (a third mortgage). And that would make sense if interest rates are higher – you’d want to keep your cheaper loan in place.
But if you can get the same or better rate with a refinance, you could replace your existing second mortgage with a new, larger loan. That might also keep your payments lower if you’d be extending repayment for a few extra years.
Home equity loan refinance for a lower payment
If you’re having cash flow difficulties, a home equity loan refinance might give you some breathing room even if the new loan has a higher interest rate.
But how can that work if your new loan will have a higher interest rate than your old one? Well, it’s because you’ll be resetting the clock on your debt.
Suppose you borrowed $50,000 with a ten-year term at 6% five years ago. Your monthly payment would be $555. And five years into repayment, your balance would be $28,713. If you refinanced that balance into a new 10-year loan at 8%, your payment would fall to $348.
However, be aware this is an expensive option in the long run. You’ll be paying interest over 15 years (five years on your existing loan plus ten years on your new one) instead of 10. And that’s costly.
So, don’t do this unless you have to. But, if cutting your outgoings is the only way to keep your financial ship afloat, you may decide it’s a price worth paying.
Finding this a tough choice? Use this home equity loan calculator to model your options.
Home equity loan refinance to replace a HELOC
Home equity loans and home equity lines of credit (HELOCs) are siblings. They’re closely related because they’re both second mortgages. But they also have significant differences.
One of those differences is that home equity loans typically have fixed interest rates while HELOCs usually have variable ones. Rising interest rates can cause HELOC payments to increase substantially.
Another difference is that HELOCs have a drawing phase in which you only need to pay the interest due each month. After a few years, the HELOC enters the repayment phase, and the payment increases to zero out the loan balance over its remaining term.
That spike can be significant. If you have a 10-year HELOC with a $50,000 balance at 6%, your minimum payment would be $250, But after five years, even if your interest rate stayed the same, your payment could jump to $967!
So, your HELOC payments may soon begin to rise, perhaps appreciably. If that prospect spooks you, using a fixed-rate home equity loan refinance to escape the danger might be a wise move.
Recognize that your monthly payment will likely increase to start. But your HELOC payment might soon race past that. And your risk exposure will be much lower because every fixed-rate home equity loan is the same.
How to Refinance a Home Equity Loan
If you’re still reading, you’ll want to know how to refinance a home equity loan. It’s not much different from what you did to get your existing home equity loan.
You’re simply applying for a new loan to replace your existing one. So, expect to complete similar forms. And to provide new versions of the same paperwork you supplied before.
How to qualify for a home equity loan refinance
If your financial position hasn’t changed much since you took out your original home equity loan, qualifying for a refinance shouldn’t be that difficult. If your home value has not fallen, your debt-to-income ratio is the same or better, and your credit rating hasn’t slipped, you should qualify.
Typical requirements for home equity financing include:
- Your credit score should be at least 680. If the rest of your application is solid (income, equity), some lenders will approve loans with a credit score as low as 620.
- After funding your new loan, you should have a home equity cushion of at least 20%. If you have excellent credit and a low debt-to-income ratio, some lenders will allow financing up to 90% of your property value.
- Your debt-to-income ratio should not be higher than 43%. A few lenders may accept DTIs as high as 50%.
The closer you are to the ideal applicant (high credit scores, lots of home equity, low DTI), the better your interest rate is likely to be.
How to refinance a home equity loan – closing costs
Home equity loan closing costs vary widely among lenders. You might pay an origination fee that covers all costs or pay several amounts for various services. Some fees are lender charges, and others, like appraisal fees and title insurance costs, are paid to third parties.
You may be able to find loans with lower costs if you get several quotes from competing lenders. Some lenders offer home equity loans with no closing costs at all. However, their interest rates may be higher.
You might save on closing costs by using the same title company you used to close your original loan.
The main point is that the total cost of your financing matters – not what the lender calls various closing costs.
How to refinance a home equity loan – comparing loan estimates
You needn't stick with your existing lender because you’re getting a whole new loan. So, be sure to comparison shop, getting quotes from several lenders. Both interest rates and closing vary widely by lender. And you could save serious sums by shopping around.
A home equity loan is a second mortgage. So each lender to which you apply should send you its quote in the form of a standard loan estimate. And, because they share the same format, they couldn’t be easier to compare.
If you intend to keep the loan for its entire term, it is easy to compare loans. Ensure the loan terms are the same – 15-year vs. 15-year, 10-year vs. 10-year, etc. Then simply look at the total cost of each – closing costs and interest – and choose the cheapest loan.
Although you need to read everything, page 3 of that form may provide the most valuable information. It will tell you how much you’ll have paid for your loan after five years. And by how much you’ll have reduced your balance over that time.
Page 3 also tells you your annual percentage rate (APR). That can be much more useful than your straight interest rate because it reflects that rate plus costs. Those costs are spread over the loan’s lifetime – even if you pay most of them upfront. So you get a better view of how costly or inexpensive your loan is overall.
The Consumer Financial Protection Bureau has an excellent article explaining what’s in a loan estimate and what each item means. It also shows sample pages, so you’ll know what to expect.
Get up to 5 competing mortgage quotes
I have a first mortgage that I also want to refinance. Should I just combine the two loans?
It can be an intelligent move to roll up your existing home equity loan within a mortgage refinance. But, usually, doing so is more costly. So, model your options before you decide.
Circumstances in which you should leave your home equity loan in place include:
The extra borrowing means your mortgage refinance counts as a cash-out refinance. The additional fees for cash-out refinancing add significantly to the loan’s cost, and those fees apply to the entire loan – not just the extra cash.
Still not sure what to do? Run your figures using this calculator. And talk things through with a friendly loan officer at one of the lenders you’re thinking of using.
How much are home equity loan refinance closing costs?
Typical home equity loan refinance costs are roughly 2% - 6% of the loan amount.
But, sometimes, depending on how long since your last first or second mortgage closing, those fees may be discounted.
Be sure to look at closing costs when comparing quotes from multiple lenders. Although your main focus is likely to be the interest rate, you should consider all charges to see which is the best overall deal.
Do I need an appraisal for a home equity loan refinance?
Your lender gets to decide whether or not it requires an appraisal. Probably, most will. But you can find plenty online who won’t. It often depends on the overall strength of your application – your credit rating, the amount of home equity you’ll have after borrowing, and your debt-to-income ratio.
And, if you refinance with your existing lender, it may well waive an appraisal in certain circumstances.
But don’t get hung up on appraisal fees. Instead, concentrate on finding your best deal, including your interest rate and costs. Of course, appraisal fees play a part in that calculation. But it’s often a pretty small one.