Can I refinance a home equity loan?

Homeowners with sufficient equity can take out a second mortgage, such as a home equity loan, to pay for significant expenses such as home improvements, a college education, or to consolidate high-interest debts.

If you need to change the terms of your home equity loan¹, such as to borrow more equity, reduce your interest rate, or adjust its term, you can refinance². Here are some reasons homeowners refinance their home equity loans, and some tips on making sure it helps you reach your financial goals.

Reasons to refinance a home equity loan

You might choose to refinance a home equity loan for several reasons:

• Get more cash out. You may want to refinance the loan for the same reason you took it out in the first place: you need cash. If the value of your home has gone up since you took the loan, you’ll have more equity available to borrow. The lender can allow you to access more of that equity. Of course, the principal owed will also increase.
• Get a better rate. If the market is offering lower interest rates than you have on your home equity loan, refinancing can lower the monthly payment.
• Extend the repayment period. Extending your loan term can reduce your monthly payment, providing you with some breathing room in your household budget. It also means you’ll pay more in total interest over the life of the loan.
• Consolidate debts. Sometimes you pull equity from your home for fun things, such as a new boat or a kitchen renovation. At other times, it’s to pay off high-interest debt, such as credit card balances. It may not be fun using a new infusion of cash to pay off that debt, but at least you’ll save a lot on interest payments.

Calculating the benefits of refinancing a home equity loan

Calculating the potential savings when refinancing a home equity loan involves comparing the current interest rate with the projected rate of a new mortgage. The process of estimating savings involves analyzing the total interest paid on the existing loan compared to what would be expected under the new loan terms.

In general, a reduction of at least one percentage point in interest rates can be a substantial indicator that refinancing might be beneficial.

But the interest rate is not the only factor. The length of your repayment term also affects the monthly payment. A longer repayment term means you’ll pay less per month but more in interest overall. A shorter term means higher payments and less interest over the life of the loan.

Finally, you must consider closing costs. As with any loan, you’ll pay closing costs on a home equity loan. This is cash you bring to closing. You can expect to pay 3% – 6% of your total loan amount in closing costs for a home equity loan.

For example, if you take out a $50,000 home equity loan, you can expect to pay $1,500 – $3,000 in closing costs. So why can’t you just roll those fees into the loan? Sometimes you can, but many lenders don’t allow this, and the amount you’ll pay for financing this sum over time adds significantly to the overall cost of the loan.

How can I qualify for a home equity loan refinance?

Refinancing a home equity loan is similar to obtaining a mortgage.

You’ll document your finances, providing tax returns and pay stubs. A good credit score and a low debt-to-income ratio will help you secure a lower interest rate on a home equity loan refinance. In general, you’ll need a credit score of at least 680 and a DTI ratio no higher than 43%. If you can’t meet these benchmarks, you may still qualify if you have substantial equity or little debt, but you might receive a higher rate or shorter repayment terms.

Your home will serve as collateral for the new loan, and you must have enough equity to borrow. Your lender will consider all loans and mortgages taken out against the property. Most lenders require a combined loan-to-value ratio of 90% or less. In other words, your total outstanding mortgage balances can’t exceed 80% of your home’s value.

Do your research before refinancing your home equity loan. Shop around to make sure you’re getting the best interest rate and repayment term. It’s ideal to start the search with your original lender, particularly if you’ve been satisfied in your past dealings with that lender.

Pros and cons of refinancing your home equity loan

It’s natural to want to negotiate a better second mortgage if you have a chance to secure a better interest rate or a more favorable payment method. As with any real estate transaction, however, refinancing a home equity loan comes with advantages and disadvantages.

Pros

Advantages of refinancing your home equity loan include:

• You can reduce your interest rate. This can either lower your monthly payment (short-term savings) or reduce the number of months needed to pay off the loan at the same monthly rate (long-term savings).
• You can borrow more equity. If your home has increased in value and boosted your equity, you can borrow more of it to pay for major expenses.
• You can consolidate debts. Paying off high-interest debts with a home equity loan can save you a lot of money on interest and streamline your monthly expenses.

Cons

Drawbacks to refinancing your home equity loan include:

• It requires time and money to obtain. You’ll have paperwork to fill out and an appraisal to schedule. You will also need to pay closing costs, which typically range from 3% to 6% of the loan amount.
• It uses your home as collateral. If you can’t make the monthly payment, your lender can take possession of your home.
• It could cost you more in the long run. You can extend your repayment period with a new home equity loan, but you’ll pay more total interest over time.
• You may face prepayment penalties. Check the terms of your existing home equity loan. Is there a penalty clause that says you must pay a fee if you close out the loan early?

How to refinance a home equity loan

Here are some of the key stages you’ll encounter as you work toward refinancing your home equity loan.

• Review your existing loan in the current context: Are current rates significantly lower than your rate? Calculate how much you’d pay in interest over time with the new loan versus the old one. Would a smaller monthly payment ease your budget situation? What would you do with the extra cash?
• Assess your equity position: How much more is the difference between what your home is worth and what you owe on it? If you can secure a significant amount more equity in the form of cash, you may be able to achieve some important goals that require financing.
• Shop around: See what different lenders offer in terms of rates, terms, and closing costs. Start with your current lender if you're satisfied with them. Since you’re a known entity to them, it might fast-track the process.
• Assemble documents and apply: You’ll need pay stubs, tax returns, other personal financial information, and property details. Lenders will check your credit score and assess your DTI ratio as well as your LTV ratio on your current mortgage.
• Assess offers: The stronger your financial position, the better rates and terms lenders will offer. Compare offers to your current loan and see how much you’ll save. Request specific details on closing costs before you agree to close.

Alternatives to refinancing a home equity loan

Refinancing a home equity loan into another home equity loan can be a wise choice if you need cash or don’t like the terms. Depending on your situation, one of these alternatives might be a better solution.

Home equity loan modification

Home equity loan modification may be available if you’re having trouble paying your loan and don’t want to refinance.

Loan modification involves changing the terms of your loan to add missed payments to the loan balance. Your rate may change, and your term may be extended, but this typically doesn’t involve additional fees. There is a negative impact on your credit in most cases.

Your lender will evaluate your application based on your financial situation and the nature of your hardship. But with some lenders and loans, modification might not be available at all.

Cash-out refinance

If you don’t wish to refinance your current second mortgage but still need cash, you can do a cash-out refinance. This involves replacing your primary mortgage with a new loan based on your home’s current value. You pay off your current loan and keep the difference to use as you see fit. You repay the cash you borrowed as part of your new mortgage.

If you want to end your home equity loan and don’t need cash, you can refinance your primary mortgage and fold the balance of the home equity loan back into it. This leaves you with one, refinanced primary mortgage.

Home equity line of credit (HELOC)

Finally, you might consider paying off the balance of your home equity loan by taking out a home equity line of credit. With a HELOC, your equity is not paid out in cash; instead, it becomes a line of credit. Rocket Mortgage® does not currently offer HELOCs.

Once placed in the HELOC, your funds are available for you to use as you see fit, such as paying off your home equity loan balance. You are only obligated to pay back what you use.

While home equity loans usually come with a fixed interest rate, HELOCs usually have a variable interest rate, so you’ll lose some predictability in your monthly payment, and you may wind up paying more in interest as market rates fluctuate.

Can you refinance an existing mortgage using a home equity loan?

You’re free to spend the assets of your home equity loan however you’d like. If you’re in the enviable position where your equity stake in your home is worth more than you owe on your primary mortgage, you can use home equity loan funds to pay off the balance of your mortgage and keep whatever is left for any other purpose. You will now own your house outright. Be cautious of early payoff penalties that may be written into the terms of your primary mortgage.

The bottom line: Refinancing a home equity loan may be right for you

Refinancing a home equity loan has the potential to help you secure a lower interest rate and a lower monthly payment. You also may be able to extend or shorten your repayment period. It may also leave you with additional funds to put toward a project or another financial goal.

That said, it’s generally best not to refinance until you have a significant amount of home equity and interest rates are lower than when you first took out the home equity loan. You’ll also want to pay attention to other details, such as closing costs and the length of repayment, to make sure it makes sense to refinance a home equity loan.

Interested in learning more about refinancing a home equity loan? Begin the process today with Rocket Mortgage.

¹ Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 11/19/25 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Ameriprise products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher priced loans are not allowed on properties located in New York. Additional restrictions apply. This is not a commitment to lend.

² Refinancing may increase finance charges over the life of the loan.