Refinancing a home equity loan: Why and how to do it

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Refinancing your home equity loan can be a good way to lower your interest rate or monthly payment. It does come with closing costs, though, so be prepared to pay around $5,000 up front.  (iStock)

Home equity loans are a type of second mortgage that lets you tap your home equity — or the portion of the home you own — and turn it into cash. Homeowners often use these loans to pay for home improvements, cover unexpected major expenses, or consolidate higher-interest debts.

Can you refinance a home equity loan?

Home equity loans can be refinanced just like traditional mortgages can. You’d typically do this if you wanted to turn more equity into cash, lower your interest rate, or extend your payment timeline.

If you’re ready to take on a new loan or refinance your mortgage, visit Credible today to compare rates and terms.

Requirements for refinancing a home equity loan

Since a home equity loan is technically a mortgage loan, you’ll need to meet a few financial requirements before you can qualify for one.

These requirements vary by mortgage lender, but you can generally expect to need:

  • At least a 680 credit score
  • 20% or more equity in your home
  • A debt-to-income ratio of 43% or lower

If your personal finances don’t meet some of these standards, there’s still a chance you could qualify for a home equity loan refinance. You’ll just need to shop around with a variety of lenders, as some may have less stringent requirements than others.

How much it costs to refinance a home equity loan

A home equity loan, just like a primary mortgage, comes with closing costs, so you’ll want to be prepared for these before applying for your loan. The sum of these costs will depend on a number of factors, including your lender, loan amount, and location, but you can generally expect to pay around $5,000 to refinance a mortgage. 

Due to these costs, it’s important to calculate your break-even point — or the point at which your refinance will save you more than it cost. If you know you’ll be in the home long enough to reach that point, refinancing your home equity loan is usually a smart move.

How to refinance your home equity loan

If you meet the requirements, are prepared for the closing costs, and expect to reach your break-even point, then you’re in a good position to refinance your home equity loan. To do this, you have two options:

Refinance into a new home equity loan

Best for: Lowering your home equity loan’s interest rate, lowering your monthly payment, taking out additional funds 

If you’d like to tap additional equity or change the terms of your existing home equity loan, then refinancing it can be a good move to consider. To do so, you’d simply apply for a new home equity loan, and those funds would be used to pay off your existing loan balance. You’d then make payments to your new lender moving forward.

Refinancing into a new home equity loan is usually best if:

  • You want to lower the interest rate or monthly payment on your home equity loan
  • You want to switch from an adjustable-rate home equity loan to a fixed-rate one
  • You want to tap additional equity
  • You want to change the terms of your loan

Get a cash-out refinance

Best for: Lowering your existing mortgage rate or monthly payment, covering sudden costs or home improvement expenses, debt consolidation, switching from an adjustable-rate loan to a fixed-rate loan

A cash-out refinance is an alternative to a home equity loan. Instead of a second mortgage that you pay in addition to your existing one — such as a home equity loan — a cash-out refinance actually replaces your current mortgage with a new one.

Here’s how it works: You apply for a new mortgage with a balance higher than what you currently owe. The funds from that new mortgage are used to pay off your existing loan balance, and you get to keep the difference in cash. You’d then just make one payment to your new lender each month (versus the two payments you would have to make with a mortgage and a home equity loan).

Cash-out refinances are a good idea if:

  • You have sudden or expected costs to cover or want to make home improvements
  • You want to pay off higher-interest debts (mortgages typically have lower interest rates than other financial products)
  • You want to lower your current loan’s interest rate or monthly payment
  • You have an adjustable-rate mortgage and want to replace it with a fixed-rate one

Deciding between a cash-refinance vs. home equity loan? ​You can explore your mortgage refinance options in minutes by visiting Credible to compare rates and lenders. ​Check out Credible and get prequalified today.

Should you refinance your home equity loan?

Refinancing your home equity loan can be a smart move in many scenarios. In some cases, it might even save you money in the long run. 

A refinance isn’t without risks (or costs), though.

When to consider refinancing

There’s no hard-and-fast "right" time to refinance your home equity loan. 

Generally speaking, though, these scenarios make the most sense:

  • You have better credit or lower debt than when you took it out. If your credit, income, or debt situation has improved since initially taking out your equity loan, there’s a good chance you’d get better terms on a new loan. That could mean saving cash or paying off the loan faster, in some cases.
  • The rate environment works. If interest rates are lower than what’s on your current home equity loan, refinancing the loan could mean decent savings — both monthly and in the long haul. A rate that’s more than one percentage point lower than your current rate is usually worth refinancing into.
  • You need a lower monthly payment. Refinancing your home equity loan allows you to change the rate and payment term. This can help lower your monthly payment if your budget calls for it.

If you’re considering a cash-out refinance, be sure to shop around. Credible’s free online tool makes finding the best deal easy — you can compare multiple lenders and see prequalified rates in as little as three minutes.

When to avoid refinancing

Equally so, here are some scenarios that aren’t conducive to refinancing a home equity loan:

  • The rate savings is just too tight. If you’d only reduce your interest rate by a percentage point or less, the savings may not be worth it — especially once you factor in the closing costs.
  • You’re already in a good financial place. If you already have a home equity loan with a low interest rate and a payment you can comfortably make each month, then it may not make sense to refinance.
  • Closing costs are too prohibitive. Closing costs typically come in around $5,000 on a refinance. If you don’t have much saved up, it might not be the right move for your household.