Can I refinance my home equity loan?

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The Credible Money Coach helps a reader understand how to refinance a home equity loan and important considerations for refinancing. (Credible)

Dear Credible Money Coach,

If you have no mortgage but have an equity loan, can that be refinanced? — Joyce

Hello Joyce, and thanks for your question. The short answer is, yes — it’s possible to refinance a home equity loan.

A home equity loan is technically a type of mortgage that allows you to borrow against the portion of your home’s value that exceeds your mortgage balance. Like any other type of mortgage or home equity product, you’ll need to check all the lender’s boxes in order to qualify for a home equity refinance.

If you’re considering refinancing into a conventional mortgage, you can use Credible to compare your prequalified rates from multiple lenders.

How home equity loans work

Home equity loans are often referred to as second mortgages because they’re usually taken out in addition to your existing mortgage. It’s a bit unusual to be in your situation, Joyce, having a home equity loan with no primary mortgage. This situation could occur if the repayment term on your home equity loan is longer than the amount of time you had left to pay on your primary mortgage.

Home equity loans work largely the same as a primary mortgage. When you close on a home equity loan, the lender will give you a lump sum. You then repay the loan, with interest, over an agreed-upon number of years — typically from five to 30.

When you refinance a home equity loan, you’ll take out a new home equity loan to pay off the balance on your old one. Your new loan can have a different interest rate and repayment term than your old loan.

Qualifying for a home equity loan refinance

To refinance your home equity loan, you’ll have to meet lender requirements. For example, it’s pretty standard for mortgage lenders to limit the amount you can borrow for a home equity loan to 80% of your home equity. So you’ll likely need to have at least 20% home equity in order to refinance your home equity loan.

Additionally, lenders will likely look for a debt-to-income ratio lower than 43%, a credit score of 680 or better, and documentation that shows you have the income needed to repay the loan. 

When is it a good idea to refinance?

It’s possible to refinance almost any kind of loan, including a home equity loan. But it doesn’t always make sense to refinance. Generally, refinancing can be a good idea if it will …

  • Lower your interest rate by at least 0.75%.
  • Allow you to make your monthly payment more manageable by extending the repayment term (although this means you’ll pay more interest over the life of the loan).
  • Allow you to withdraw cash you need for an important purpose, like home repairs or improvements.

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About the author: Dan Roccato is a clinical professor of finance at University of San Diego School of Business, Credible Money Coach personal finance expert, a published author, and entrepreneur. He held leadership roles with Merrill Lynch and Morgan Stanley. He’s a noted expert in personal finance, global securities services and corporate stock options. You can find him on LinkedIn.