Can You Refinance a Home Equity Loan?

Can You Refinance a Home Equity Loan?

  • Susan Solliday
  • 03/20/23

If you took out a home equity loan several years ago, your financial circumstances might have changed since then, or you might want to take advantage of lower interest rates. Refinancing could get you a new loan that better suits your current needs.

Why Might You Want to Refinance?

Your financial situation might be different now than it was when you took out your home equity loan. You might be struggling to keep up with your payments and might want to extend the loan term and pay less each month. If you’re doing well financially, you might want to shorten the home equity loan term so you can pay it off faster.

Your home equity loan might have low monthly payments followed by a large balloon payment. If you want to eliminate the balloon payment and make equal monthly payments, refinancing can let you do that.

The home equity loan might have an adjustable interest rate. If you’re concerned about fluctuating payments and you would like more predictability, you can refinance and take out a new loan with a fixed rate.

It’s possible that interest rates have fallen since you took out your home equity loan. Refinancing and locking in a lower rate could help you save thousands of dollars in interest.

You might need additional funds to cover home repairs or other large expenses. Refinancing your home equity loan can let you receive another lump sum.

What’s Required to Refinance a Home Equity Loan?

A lender will consider many of the same criteria that it looked at when you applied for your first mortgage and when you took out your current home equity loan. You will have to provide pay stubs, tax returns, and other documents. 

Your debt-to-income ratio and credit score will be important. A high credit score can help you qualify for a lower interest rate than a borrower with less-than-stellar credit. 

Your combined loan-to-value ratio, or the total of all mortgages on your property, cannot exceed a percentage set by the lender. When you apply to refinance your home equity loan, the lender will make sure that you have enough equity to meet its guidelines. The amount of equity remaining can also influence your interest rate.

What Are the Pros and Cons of Refinancing?

If you refinance your home equity loan, the lender might pay the closing costs, which could be thousands of dollars. Extending the loan term can reduce your monthly payments but cause you to pay significantly more in interest. If you refinance and pull more equity out of your house, that will increase your loan balance and might significantly increase your monthly payments. If you don’t meet your obligations, you can lose your home. 

Is Refinancing Right for You?

Refinancing your home equity loan might save you money, but it can be risky. Research rates and terms and think carefully about your financial circumstances. Before you refinance, make sure that you will be able to cover the monthly payments. 

If you have any questions, or you want to start a dialogue about refinancing, let’s talk.
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