How To Refinance a Home Equity Loan

Refinancing a Home Equity Loan for Lower Rates or a Cash-Out

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Home equity loans, much like mortgages, use the equity you’ve built in your home to secure low-cost debt. They’re popular because of their flexibility, the amount you can borrow, and low rates. However, you might find yourself with a home equity loan that you want to refinance.

Refinancing a home equity loan is possible and can help you lower your rate or cash out more equity, but it’s important to understand the risks.

Key Takeaways

  • Home equity loans use your equity to secure low-interest access to funds you can use for home improvements, debt consolidation, or large expenses.
  • Refinancing your home equity loan allows you to adjust loan terms or cash out equity again.
  • Your home serves as collateral for the refinanced loan, so there is some risk involved should you be unable to repay it.

Can You Refinance a Home Equity Loan?

It is possible to refinance a home equity loan. At its most basic, refinancing simply involves getting a new loan and using the proceeds from that loan to repay your existing debt. However, you can work with your current lender to make the refinancing process more seamless.

When To Consider Refinancing

There are a few scenarios where refinancing a home equity loan makes sense.

One is if you want to reduce the interest rate of the loan or swap between a fixed- and adjustable-rate loan. Home equity loans, like mortgages, have interest rates based on market rates. If market rates have fallen, refinancing lets you replace your existing loan with a new one at a lower rate.

You can also refinance your home equity loan to reduce your monthly payments. Securing a lower interest rate is one way to do this, but you can also extend the term of your loan. This will increase its overall cost but reduce the amount you pay each month.

Another reason to refinance is if you want to get equity out of your home again. For instance, if you took out a home equity loan for $100,000 and have paid back $50,000, you can refinance with a new loan for $75,000, then access $25,000 in the equity.

Options for Refinancing a Home Equity Loan

There are two primary ways to refinance your home equity loan: a cash-out refinance and a new home equity loan.

Cash-Out Refinance

A cash-out refinance of your primary mortgage enables you to use the cash you take out to pay off your home equity loan. With a cash-out refinancing, you refinance your existing mortgage to a higher balance. For example, if you owe $200,000 on your mortgage, you can refinance to a $250,000 loan to access $50,000 you can use for other purposes.

A benefit of refinancing a home equity loan this way is that it simplifies payments. Where you previously had to pay both your mortgage and home equity loan bills, now you only have one to pay. Another perk is that mortgage rates are often lower than home equity loan rates, making this one way to reduce the interest that accrues on your remaining home equity loan balance.

New Home Equity Loan

You can also refinance your existing home equity loan by applying for a new home equity loan. Simply use the proceeds of the new loan to pay off the existing one. This can be simpler than refinancing your entire mortgage because underwriting may be less strict or time-consuming. It also usually means paying fewer closing costs and other fees. However, rates may be higher and you’ll still have two separate payments to deal with.

Consider the Risks Before You Refinance

Refinancing does involve some risks you need to consider.

One is that refinancing isn’t free. Many lenders charge origination, closing, or other fees, so refinancing means paying those costs. If your goal is to save money by refinancing, you need to account for those charges when deciding whether this is the best option for you.

You also have to think about the value of your home. If your home’s value has dropped, refinancing might be difficult or cause your equity to decrease to the point that you’ll have to pay for mortgage insurance.

Also, consider that your home serves as collateral for home equity loans. If you fail to make payments because you’ve taken on too much debt, the lender could foreclose and you might lose your home.

The Bottom Line

Refinancing a home equity loan is possible and can help you adjust the terms of your loan or lower your monthly payment. However, it’s important to keep the risks in mind and make sure that refinancing will help you reach your long-term goals.

Frequently Asked Questions (FAQs)

How often can you refinance a home equity loan?

There’s no limit for how frequently you can refinance a home equity loan. However, refinancing costs money, so you’ll want to weigh the costs before doing so.

How long does a refinance take?

Each lender has different timelines and processes for refinancing, but in general, expect it to take about 30 to 45 days to close on a home equity loan refinance.

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  1. Discover. “When To Refinance With a Home Equity Loan.”

  2. TD Bank. “What Can a Home Equity Loan or Line of Credit Be Used For?”

  3. Freddie Mac. “Understanding the Costs of Refinancing.”

  4. Discover. “Loan-To-Value & Equity: How Much Do You Need To Refinance?”

  5. BCU. “Mortgage Refinance Timeline.”

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