How to refinance a home equity loan

If you’re a homeowner, a home equity loan can help you cover repairs, home renovations, and other costs that might come up.

But there may come a time when you want to refinance your home equity loan, whether you want to lower your monthly payment or take advantage of lower interest rates.

Refinancing a home equity loan isn’t the right move for everyone — it depends on your financial goals and circumstances. This guide will walk you through how to refinance a home equity loan, the pros and cons, and when it might be the right strategy.

What’s a home equity loan?

A home equity loan is a type of second mortgage. It allows you to borrow against your home equity — the difference between the value of your home and how much you still owe on it — and get a lump-sum payment in return.

You then repay the loan on a monthly basis (in addition to your existing mortgage) over an extended period of time — typically anywhere from five to 30 years. But be cautious — if you can’t repay your home equity loan, the lender could foreclose on your home.

Homeowners often use home equity loans to cover the costs of repairs or home improvements, but that’s not all you can use them for. Other uses include paying off higher-interest debts, covering medical expenses, and paying for college tuition.

Can I refinance my home equity loan?

You can refinance a home equity loan, just as you can with a traditional mortgage.

Some reasons you might want to do this include:

• Lower your interest rate. Interest rates fluctuate over time. If rates fall below what you currently pay on your home equity loan, you might want to refinance to take advantage of a lower rate and save money. Depending on the difference in rates, you could save significantly on interest.
• Reduce your monthly payment. Refinancing can also reduce your monthly payment, which can help you free up cash for other financial goals or weather a financial emergency. The easiest way to reduce your payment is to refinance into a longer-term loan or into a loan with a lower interest rate.
• Change your repayment terms. While you might opt for a longer repayment term to lower your monthly payments, you can also refinance into a shorter-term loan to pay it off quicker and reduce your overall interest costs.
• Tap additional equity. You may be able to access more of your home equity through refinancing, which can allow you to cover other expenses.
• Switch from an adjustable rate to a fixed rate. Most home equity loans come with fixed interest rates, but if yours has an adjustable rate (also known as a variable rate), you might refinance into a fixed-rate loan for more stability. An adjustable-rate loan can change over time, making it harder to budget for.

You can compare mortgage refinance rates all in one place with Credible.

Home equity loan vs. cash-out refinance

A cash-out refinance is an alternative to a home equity loan. Instead of taking out a second mortgage in addition to your existing one, a cash-out refinance replaces your current mortgage with a new loan for more than you owe on your existing mortgage. You’ll pocket the difference as cash. You can still use this lump-sum payment for other expenses, but you won’t have the second monthly payment that comes with a home equity loan.

Both a cash-out refinance and a home equity loan require you to have a certain amount of equity in your home.

You might choose a cash-out refi over a home equity loan if interest rates drop below your current loan’s rate or you just don’t want a second monthly payment. A home equity loan may be better if you want to leave your first mortgage terms untouched.

In some cases, you may be able to do a cash-out refinance and use those funds to pay off your home equity loan. This depends on how much equity you have in your home. Lenders typically let you borrow up to 80% of your home’s equity for a cash-out refinance.

Pros and cons of refinancing a home equity loan

Refinancing your home equity loan can be a smart move, but it’s not right for everyone. Here are some benefits and drawbacks you’ll want to consider before moving forward.

Pros of refinancing a home equity loan

• You could lower your interest rate or monthly payment. Depending on current interest rates, your credit, and the loan term you choose, you could get a lower rate, a lower monthly payment, or both by refinancing.
• You might be able to pay off your loan sooner. Refinancing can also help you pay off your loan sooner if you shorten your loan term.
• You may be able to tap additional home equity. If you’ve gained more equity in your home since first taking out your loan, refinancing may allow you to tap it and get a larger lump-sum payment.

Cons of refinancing a home equity loan

• It comes with closing costs. The typical home equity loan comes with upfront closing costs of 2% to 5% of the loan amount, and with cash-out refinancing, you’ll generally pay 3% to 6% in closing costs. If you don’t have this on hand, it might not be the best move.
• It puts your home at additional risk. Home equity loans use your home as collateral. Having both a home equity loan and a mortgage can put you at higher risk of foreclosure should you lose your job or face other financial struggles.
• You won’t always get a lower rate. Your new interest rate will depend on the current rate environment and your credit. If your credit score is lower than it was when you initially took out the loan, refinancing might mean a higher rate than you currently have.

How to refinance a home equity loan

Refinancing a home equity loan is a fairly straightforward process.

Here’s a breakdown of the steps you’ll need to take:

1. Check your credit. You’ll generally need a credit score of at least 680 to refinance a home equity loan. Typically, the higher your score, the better the rates you’ll qualify for, though.
2. Calculate your home equity. Your home’s equity will determine how much more money you can access through refinancing. Equity is the value of your home minus your total mortgage balance.
3. Find a lender. You don’t have to use your existing lender to refinance. You should get quotes from at least three different mortgage lenders to ensure you get the best rate and terms for your situation.
4. Fill out the application. Once you’ve selected a lender, you’ll need to complete and submit an application. This will require a hard credit check, which can temporarily lower your credit score by a few points. You’ll also need to submit financial documentation, such as tax returns, W-2s, and pay stubs.
5. Close on your loan. At closing, you’ll sign your paperwork and pay your closing costs.