Can I Refinance a Home Equity Loan?

Can you refinance a home equity loan? It’s a question that many homeowners are no doubt asking themselves right now, given how popular home equity loans and home equity lines of credit (HELOC) have proven to be for many families.

These loans, which allow you to adjust payment terms related to your home or draw upon equity contained within it to help pay for repairs or home improvements, can often provide a helpful financial tool. But it’s not uncommon to also wish to refinance a home equity loan – a process that is indeed possible, and also at times highly recommended depending on your individual circumstances.

A home equity loan is a fixed-term loan that is secured by a borrower’s home and typically takes the form of a second mortgage. Apply for a set amount of funds, and if your request is granted by a financial institution, you’ll essentially receive that amount in the form of an upfront lump sum payment that comes with a fixed interest rate and schedule of payments that applies over the life of the loan. This fixed-term loan is presented to you by the lender based on the equity in your home (the amount of value you have in your home that exceeds the current outstanding loan balance).

Conversely, a HELOC is a financial product that lets you borrow against current home equity using a revolving credit account and repay this money over an extended period. Similar to a credit card, a HELOC allows borrowers to tap into a credit line up to a preset limit; it’s a method of tapping into your home equity, as is a cash-out refinance. A cash-out refinance allows you to replace your current mortgage with a different loan with new payment terms, or transfer home equity into cash – and apply this cash toward paying off many common expenses.

If you’d like to tap into the equity in your home to fund home improvements or upgrades via any of these options, be sure to budget accordingly. You’ll not only want to be aware of potential loan amounts, financing terms, and monthly payments, but also any associated closing costs.

As we discussed above, taking on a home equity loan or HELOC can mean taking on additional risks of a second mortgage and the associated payments. All things considered though, it’s not uncommon to want to refinance a home equity loan when it’s possible to secure a better interest rate or more favorable payment method. In fact, doing so can often help you stay more cash flow positive, and better able to meet monthly payment obligations.

It is possible, but not common, to use a home equity loan to refinance your existing mortgage as well. That’s because the process makes financial sense primarily for those who have a lot of equity built up in a home. For example: If you landed a first mortgage at a time when interest rates were relatively high, only to see them later drop, and hold a great deal of equity in your property, then refinancing using a new home equity loan may prove a handy lifesaver.

As with any real estate transaction, refinancing a home equity loan can come with advantages and disadvantages:

Pros

• Opportunity to capitalize on lower interest rates
• Chance to transition from adjustable-rate to fixed interest-rate loan
• Can help you obtain more working capital for home improvements and other projects
• Offers a means to adjust monthly payments and repayment terms

Cons

• Takes additional time and expense to obtain, and is backed by your property
• Requires homeowners to assume additional risk and additional payments
• May obligate you for a longer payment term period

Note that refinancing a home equity loan is similar in process to obtaining a mortgage, in that you will need to provide detailed financial documentation ranging from tax returns to pay stubs and home records. In addition, it also helps to have a higher credit score and more favorable debt-to-income (DTI) ratio if you want to get the best rates when seeking to refinance your HELOC or home equity loan.

In order to refinance a home equity loan, you’ll need to guarantee the transaction with your property and have built up a minimum amount of equity in your home. Your lender will consider any and all loans and mortgages that you have currently taken out against the property. The majority of financial lending institutions will require you to have a combined loan-to-value ratio (LTV) of under 85%. In other words, the sum of all your current outstanding mortgage balances cannot represent more than 85% of your home’s total current value.

As a general rule, you may find that refinancing a home equity loan can help you obtain lower interest rates and payments while also adjusting loan repayment terms and extending financial payback periods.

Similarly, it can also create an opportunity to switch from an ARM to a fixed-rate loan and back or borrow additional funds if you find that you need more money for personal savings or home repairs and improvements. However, it’s generally best to reserve refinancing for times when you’ve built up a significant amount of equity in your home, or rates have dropped significantly since you first obtained a home loan.

If a cash-out refinance makes more sense for you, contact the Home Loan Experts with Rocket Mortgage.