Does It Ever Make Sense to Refinance a Home Equity Loan?

Taking out a home equity loan could make sense if you need cash for home improvements, repairs or other expenses. You might be wondering if you can refinance home equity loan debt to get a lower interest rate or change your payment terms. The short answer is yes, refinancing a home equity loan is possible, though there are some requirements you’ll need to meet to qualify.

Talking to your financial advisor can help you decide if home equity loan refinancing makes sense.

Understanding Home Equity Loan Refinancing

Home equity loans allow you to tap into your equity value for cash. A home equity loan is a type of second mortgage that you repay with interest, in addition to your primary mortgage loan. Home equity loans typically have fixed interest rates and repayment terms can extend up to 30 years.

Refinancing a home equity loan means taking out a new loan to pay off the old one. You’d then make payments to the new loan at the terms set by the lender. And you’d still be responsible for making payments to your primary mortgage as well.

Reasons for Refinancing Home Equity Loan

There are several scenarios when refinancing a home equity loan or any type of mortgage could make sense:

• Changing your rate. First, you might refinance if it would allow you to get a lower interest rate. Reducing your interest rate could save you money on the loan and it may result in a lower monthly payment as well.

• Getting different loan terms. For example, say that your original home equity loan has a 20-year term, but you’d like to extend it. You could refinance it into a 30-year loan instead. You can also do the reverse and refinance a longer loan for a shorter term, though that can mean a higher monthly payment.

• Switching loan types. If you have a variable rate home equity loan you might refinance to a fixed rate. Doing so could give you some predictability where your payments are concerned since you don’t have to worry about interest rate fluctuations affecting what you pay.

• Taking out more equity. If your equity has increased since you took out a home equity loan, you might refinance it to draw out more cash. Just keep in mind that doing so means you’ll have a larger mortgage debt to repay.

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Advantages of Home Equity Loan Refinancing

Refinancing a home equity loan can offer some benefits to homeowners. Here are the main pros to know about home equity loan refinancing.

• Refinancing a home equity loan could save you money if you’re able to get a lower interest rate.

• You might be able to lower your monthly payment, either by reducing the interest rate or changing the loan terms.

• Choosing a shorter repayment term could help you pay off a home equity loan faster, freeing up money for other financial goals.

It’s helpful to understand what you hope to get out of refinancing home equity loan debt before making a move. That can also help you decide what kind of loan terms make the most sense.

Disadvantages of Home Equity Loan Refinancing

While there are some good reasons to refinance home equity loan balances, there are a few cons to know.

• Refinancing may save you money on interest but you’re essentially just shuffling debt around.

• Your lender may expect you to pay closing costs on the refinance loan and there may be a prepayment penalty if you decide to pay it off early.

• Qualifying for home equity loan refinancing might be difficult if you don’t have sufficient equity or meet the lender’s minimum credit score and income requirements.

It’s important to note that refinancing into a longer loan term may not save much money, even if you’re getting a lower interest rate. The longer you pay on the loan, the more you’re paying in interest overall.

Using an online mortgage refinancing calculator can help you estimate your savings with different loan terms.

How to Refinance a Home Equity Loan

If you’d like to refinance your home equity loan, a good first step is calculating how much equity you have in the property to determine how much you might be able to borrow. Lenders will look at your loan-to-value (LTV) ratio, which is the loan amount divided by the property value. Generally speaking, a good LTV for mortgage refinancing is 80% or less.

Once you’ve done that, you can move on to the next phase which includes:

• Shopping around to find the right lender to work with.

• Applying for a refinance loan and submitting the required documentation

• Completing the appraisal if the lender requires one.

• Reviewing the loan disclosures to make sure you understand them.

• Closing on the loan and paying any costs due.

When comparing lenders, it’s helpful to look at the minimum requirements to qualify for a home equity loan refinance, including LTV and credit score requirements. It’s also a good idea to check the costs. For example, will you need to pay closing costs out of pocket or are they rolled into the loan? Will you be charged a prepayment penalty if you pay the refinance loan off early?

In terms of documentation, the lender may ask for the same things that were required to get your first mortgage loan. The list can include tax returns, W-2s, bank statements and investment account statements. The more documentation you have to demonstrate your ability to pay, the better.

If the lender gives you the option to roll closing costs into the refinance loan, consider the pros and cons before agreeing. On the one hand, you won’t have to pay any money out of pocket to complete the refinance process. However, you’re still going to pay those closing costs over time and with interest since they’re included in the loan.

The Bottom Line

Refinancing a home equity loan is something you might consider if you’re ready to make changes to your existing loan or want to draw more equity out of your home. Estimating the costs and the potential long-term savings is a good starting point. And of course, keep in mind that your new payments need to fit your budget, so you don’t run the risk of falling behind.

Mortgage Tips

• When you’re not sure whether refinancing a home equity loan is ideal, talking to your financial advisor can help. Your advisor can help you evaluate the pros and cons of refinancing and what kind of terms might work best. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Your bank might offer home equity loan refinancing options, but you may consider working with an online lender instead. An online lender may be able to offer lower interest rates for a home equity loan refinance, charge fewer fees or close on the loan in a shorter time frame. You may also be able to get pre-approved for a home equity refinance loan online, without affecting your credit scores. Keep in mind, however, that a hard credit check might be required if you decide to go ahead with submitting a full loan application.

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