Can You Refinance a Home Equity Loan?
- You can refinance a home equity loan with a new home equity loan, a HELOC, a cash-out refinance, or, in some cases, a personal loan.
- Most homeowners refinance to lower their interest rate, reduce their monthly payments or access additional equity.
- Refinancing may not make sense if the closing costs outweigh your savings, you plan to move soon, your credit score has dropped or you’re close to paying off your current loan.
If you’ve had a home equity loan for a while and want a better rate or lower monthly payments, you might be wondering: Can you refinance a home equity loan? The answer is yes, but it’s crucial that you understand the costs and eligibility requirements first.
We’ll cover when refinancing a home equity loan is worth it, how lenders evaluate your application and which refinancing option may save you the most money.
Home equity loan refinance options
| Refinance option | What it does | Best if you want to… |
|---|---|---|
| Cash-out refinance | Replaces both your first mortgage and second mortgage with one new, larger mortgage |
|
| New home equity loan or HELOC | Refinances only your second mortgage while keeping your first mortgage intact |
|
| Personal loan | Replaces your second mortgage with an unsecured personal loan |
|
Option 1: Refinance both your first and second mortgage with a cash-out refinance
You can refinance into a new mortgage using a cash-out refinance. This is a new loan that also replaces the mortgage you used to buy the house. Because it has a larger loan amount than the existing loan, you’ll get to take the difference in cash.
This option may make sense if you want:
- One monthly payment that covers all of your mortgages
- A lower overall payment
- Access to additional cash from your available home equity
- To spend the cash required to cover closing costs
Option 2: Refinance only your second mortgage into a new one
If you don’t want to touch your first mortgage, you can simply apply for a new home equity loan. Or you could choose to refinance into a home equity line of credit (HELOC), another second mortgage option that’s similar to a home equity loan but with some key differences (we’ll cover those later).
This option makes sense if you want:
- To keep your existing first mortgage and its interest rate
- To potentially lower your home equity loan interest rate or extend your repayment timeline
- To have flexible borrowing options — in the case of a HELOC — for ongoing expenses (like renovations or tuition) that allow you to access additional funds later without applying for another loan
- To enjoy interest-only HELOC payments for a period of time
- To avoid the closing costs that come with a full cash-out refinance
Option 3: Refinance only your second mortgage using a personal loan
If you want to separate your mortgage debt from your other borrowing needs, you can refinance your home equity loan with a personal loan. Unlike home equity products, personal loans are unsecured, which means your lender won’t place a lien against your home or require a new home appraisal.
This option could be for you if you want to:
- Avoid the risk of foreclosure that comes with tying your home to additional debt
- Keep your existing first mortgage and its interest rate
- Refinance a smaller balance that may not justify taking out a brand-new HELOC or paying refinance closing costs on a cash-out refinance
- Avoid the appraisal requirements that come with mortgages
- Get funding more quickly than a traditional mortgage refinance may allow
There’s no specific limit on how frequently you can refinance your home equity loan, but you may be limited by lenders’ restrictions and requirements — for example, a waiting period between refinances or a minimum equity amount that must be maintained.
Costs to refinance a home equity loan
| Loan option | Estimated closing costs (as a percentage of the loan amount) |
|---|---|
| Cash-out refinance | 2% to 5% |
| HELOC or home equity loan | 2% to 5% |
| Personal loan | 1% to 10%+ |
It’s important to plan for the closing costs on a home equity loan, HELOC, cash-out refinance or personal loan. Closing costs can include:
- Loan origination fee
- Home appraisal fee
- Credit report fee
- Title search fee
- Document preparation fees
- Lawyer and notary fees
Some lenders offer no-closing-cost loans, but you’re usually required to take a higher interest rate as part of the deal. That, along with the increased loan amount, means you’ll pay more in total interest.
Pros and cons of a home equity loan refinance
Pros
-
Total interest savings. Locking in a lower interest rate or reducing your loan term can save you a lot of money in interest. - Monthly payment savings. A lower interest rate can mean a smaller mortgage payment each month.
- Flexibility. You can use the funds for virtually any purpose, such as renovating your home, covering medical expenses or consolidating high-interest debt.
-
Tax benefits. If you used the cash to “buy, build or substantially renovate”
your home, you can deduct any interest you paid on a home equity loan when tax time rolls around.According to the IRS’s rules.
Cons
- Risk of foreclosure. If you can’t keep up with your home equity loan, HELOC or first mortgage payments, you could lose your home.
- Vulnerability to falling home values. If home values in your area fall and you’re carrying a large home equity loan balance, you could end up “underwater” on the loan. That means that you’d owe more than the home is worth.
- Closing Costs. Refinancing a home equity loan usually involves paying closing costs and fees, which can add to the total cost of the loan.
- Fees. Appraisal, origination and early closure fees are common with a home equity loan refinance. And if you choose to refinance using a HELOC, be on the lookout for annual membership or transaction fees.
How to refinance a home equity loan
- Decide on a loan type. Review your current home equity loan and overall financial picture to determine if refinancing could offer better rates or terms. Consider your financial goals and what type of refinance best fits them.
- Comparison shop. Research at least three to five lenders to compare interest rates, terms and fees for refinancing a home equity loan. Don’t forget to check with your current lender, as they might offer competitive refinancing options to retain you as a customer.
- Apply for the refinance loan. Choose the lender that offers the best terms for your situation and submit an application. You’ll need to provide documentation of your income, home appraisal and current loan details. Be prepared for the lender to conduct a thorough review of your financial history and credit score.
- Close on the loan. Once you’re approved, your lender will give you documents to review that spell out your new loan terms. In order to finalize the deal and close on the refinance, you’ll have to pay your closing costs and any other upfront fees.
Qualifying to refinance a home equity loan
Here are qualification requirements you need to know if you choose to refinance a home equity loan with a cash-out refinance or new second mortgage:
-
Equity: 15% minimum
You’ll need to have equity available to borrow from, but you can’t borrow the full amount — lenders typically limit your borrowing to 80% to 85% of your home’s equity. -
Credit score: 620 or higher
Credit score requirements vary by lender, but many lenders require a minimum 620 credit score for home equity loans or HELOCs. Generally, the higher your LTV ratio, the better your credit score needs to be. And for a conventional cash-out refinance, you’ll need at least a 680 credit score. -
LTV ratio: 80% or lower
Lenders calculate your loan-to-value (LTV) ratio by taking the loan amount secured by your home and dividing it by your home’s appraised value. Most cash-out refinance lenders set an 80% maximum for your LTV.
If you opt for a second mortgage, you’ll need to look at your “combined” LTV (CLTV) ratio, which includes your new loan in the calculation. Generally, you need a maximum 85% CLTV ratio, though some lenders may allow up 100%. -
DTI ratio: 43% or lower
Your debt-to-income (DTI) ratio is the percentage of your gross monthly income used to make monthly debt payments. Most lenders prefer that your DTI not exceed 43%.
Learn more about home equity loan requirements.
Is a home equity loan refinance right for you?
Run through this checklist to determine whether a home equity loan refinance makes good financial sense before you apply:
- Does the current rate environment make it possible for you to reduce your interest rate? The average interest rate offered on the LendingTree platform for a $50,000 home equity loan is 7.35%. If your current home equity rate is significantly higher, you could benefit from a refinance.
- Has your credit profile improved since you took out your first mortgage or home equity loan? Perhaps you paid off a few credit card balances or a car loan and your credit score increased. This puts you in a good position to grab a lower interest rate and monthly payment if you get a new home equity loan. If your credit has dropped, however, your interest rate offers may not confer much financial benefit.
- Are you okay with extending your loan term? Taking out a new loan means restarting the clock with a new loan term. Doing so will cut down your monthly payment amount, but can significantly add to the interest charges you’ll pay in the long run.
- Do you plan to stay in your home long enough to reach the break-even point? Calculate your break-even point, which is the amount of time it would take you to recoup the costs you paid for your home equity loan refinance. Make sure it aligns with your life plans; otherwise, your refinance could end up hurting you rather than saving you money.
- Do you have enough room in your monthly budget? Although you may qualify for a home equity loan refinance, you can’t let lenders decide what you can afford. Take inventory of your monthly budget and determine if you really have room for all of the costs and fees associated with refinancing your home equity loan.
- Does your available equity match your financial goals? If you didn’t initially borrow the maximum amount of equity allowed, or if you’ve built up significantly more equity in your home, a new loan could help you access more. But if you’re already running low on equity, you may have a tough time qualifying for a new loan.
Have a home equity line of credit? Here’s what you should know about refinancing a HELOC.
Compare Home Equity Offers