If you have a home equity loan but want better rates or different terms, there are ways to refinance. Learn more about how a home equity loan works and about the key differences in refinancing options to keep in mind.
Who Qualifies To Refinance Their Home Equity Loan?
Lenders look at several factors to determine whether or not you can refinance your loan, including your:
Credit scoreHome valueMortgage balanceIncome and employment historyDebt obligations
You can check with your lender for other qualification guidelines. For example, many require you to have at least 20% equity in your home before you can refinance.
Refinancing Options for Your Home Equity Loan
When you refinance your home equity loan, you essentially take out a new loan to pay off the old one. This new loan has a different interest rate, term, and fees than the one it replaces. If you liked your lender for your original home equity loan, you can consider reaching out to them about their current refinancing options. Once you find a lender to work with, you’ll need to apply for the refinance. As part of this process, you’ll need to provide documentation that proves you make enough money to make the monthly repayments. You’ll likely also need to have your home appraised to make sure you have enough equity. After you’ve qualified for a loan, decide what type of refinancing you want. The most common types are a home equity loan modification, a new home equity loan, and a mortgage consolidation.
Home Equity Loan Modification
A home equity loan modification changes the original terms of your loan agreement. For example, you may be able to get a lower interest rate or extend the length of your loan so you have more time to pay it off. If you’re having trouble making the payments on your home refinance loan because your income decreased or your loan payment increased, you might consider a home equity modification. When you contact your lender, be prepared to provide information about your household income and expenses, and proof of the financial hardship you’re experiencing. This information can help your lender see if you qualify.
New Home Equity Loan
With a new home equity loan, your new loan pays off the old one, and you get a new interest rate, term, and monthly payment. A new home equity loan can save you money in the long term or in monthly payments if you can find a loan with better terms than your current one.
Mortgage Consolidation
You can use a mortgage consolidation to roll your first and second mortgages into one new loan so you no longer have to make separate payments for each. This can make it easier for you to manage your payments each month, and if you consolidate with a loan that has a lower interest rate, you can save money over time. However, your new loan will be larger because you’ll need it to cover both what you still owe on your house and the amount of your home equity loan.
How Are Home Equity Loan Refinance Rates Determined?
Many factors determine the interest rate you’ll pay when you refinance a home equity loan. Unfortunately, some of these factors, such as economic trends, are beyond your control. For example, when the Federal Reserve changes the federal funds rate, the prime interest rate (the lowest interest rate a bank charges to lend money) typically increases. So when the prime rate goes up, so do home equity loan rates. Despite the elements you can’t control, you can take certain steps to try to get a lower interest rate. These include:
Improving your credit scoreChoosing a refinance loan with shorter termsPaying off other debt to improve your debt-to-income ratioSelecting a variable-rate loan
Lenders have their own internal guidelines used to set rates, so it helps to compare offers from multiple lenders to get the best terms.
Other Refinancing Costs
Remember that when you refinance, you’re applying for a new loan, which is a process that has costs associated with it. These include fees for the application, the appraisal, your credit report, and more. Lenders also typically tack on closing costs and fees for appraisals, title searches, credit reports, and other services. Loan fees add up quickly. Consider budgeting for up to 6% of the total cost to refinance your home equity loan, although fees will vary from loan to loan.
Pros and Cons of Refinancing a Home Equity Loan
Pros Explained
Potential to save money each month: If you can lower your interest rate, you can reduce the amount of money you need to pay.More favorable terms: You might be able to get new terms on your loan. This includes whether it’s a fixed or variable rate. You can also adjust your repayment length.Can consolidate loans: If you have multiple loans, it can be difficult to keep track of all the different payments. When you refinance, you can roll everything into one loan. This can make it much simpler to manage.
Cons Explained
Loan fees: When you refinance, you’ll need enough money to pay for fees and closing costs.Need to meet qualifications: You’ll need to meet strict qualifications to get a refinance loan. Lenders are going to look at your credit score, debt-to-income ratio, and more. In addition, if your house doesn’t have enough equity, you won’t qualify for the new loan.Might not save as much as you expect: If you don’t lower your interest rate significantly or shorten your repayment term, you may not save as much as you expect.
Alternatives to Home Equity Loan Refinancing
If you don’t think refinancing is the right move for you, you can consider other options if you need to reduce your loan costs. You could try to negotiate with your current lender, which might be willing to work with you to lower your interest rate or extend your payment terms. If you let them know you found a better rate somewhere else, they may be willing to make changes to your loan to keep your business. If you don’t have enough equity to qualify for a refinance loan, you might be able to get a personal loan. You can use that money to pay off your home equity loan. Also, the government has programs in place to help homeowners who are struggling to make their payments. You can turn to resources from the Federal Housing Finance Agency to learn more about what mortgage assistance options are available to you. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
