Most homeowners understand they can refinance their first mortgage to take advantage of lower interest rates, change their loan type, or adjust their repayment term. What may be less clear is whether that also applies to a second mortgage. So, can you refinance a home equity loan?
The short answer is yes. Similar to refinancing a mortgage, refinancing a home equity loan lets you take advantage of lower interest rates and longer repayment terms. It also may allow borrowers to consolidate debts into a single plan with better terms.
There are several ways you can refinance a home equity loan, each offering its own pros and cons.
Key Takeaways:
- Homeowners may have many reasons for refinancing a home equity loan — also called a second mortgage — including: to get a lower interest rate, to borrow additional cash, or to reduce their monthly payment.
- Refinancing a home equity loan requires you to apply for a new loan and meet the financial requirements for approval.
- A mortgage lender can help you navigate the process, so it’s a good idea to shop around for terms that work for you.
Reasons To Refinance a Home Equity Loan
Here are some common reasons to refinance a home equity loan.
You can get a lower interest rate
If interest rates have fallen since you took out your home equity loan, refinancing to a lower rate can reduce your monthly payment and save you thousands of dollars in interest over the life of the loan.
You need additional cash for a major expense
If you need to borrow more equity for a major expense, refinancing your home equity loan can give you access to that cash at an affordable interest rate.
You need to reduce your monthly payment
If you’re struggling to pay your bills, refinancing your home equity loan to a longer repayment term can relieve some immediate financial pressure by reducing the monthly payment. The trade-off is paying more total interest on the loan.
Your financial situation has changed
If you find that you need more funding to complete your original goal, home equity loan refinancing may make sense. If making ends meet is tough, you can refinance to reduce your monthly payment. And if your income or your home’s value has increased, you might consider refinancing to pay off your loan more quickly to incur less interest.
You want to consolidate debt
One of the most common reasons to refinance is to consolidate debts. With a home equity loan, that means you could refinance to a new home equity loan and use the cash you borrow to pay off student loan debt, credit cards, or other high-interest debts. You also could refinance your first and second mortgages into a new first mortgage to simplify your finances.
Options for Refinancing a Home Equity Loan
There’s more than one way to refinance a home equity loan. Here are some common refinancing options for home equity loans that could help you achieve your financial goals.
Refinance to a new home equity loan
Refinancing to a new home equity loan basically means replacing your existing loan with a new one. You can do a rate-and-term refinance that just alters the interest rate and repayment term of your loan. Or, if you have enough equity in your home, you can take out a loan for a larger sum and use that cash as you see fit. You would repay the cash you borrow as part of your new loan’s repayment plan.
Refinancing a home equity loan essentially requires you to apply for and be approved for the loan all over again. Your home would be the collateral for the new loan, and you’d have to meet your lender’s financial requirements and pay closing costs.
Pros and Cons of Refinancing a Home Equity Loan
| Pros | Cons |
| You can reduce your interest rate. | If you can’t afford the new loan terms, you could lose your home. |
| You can borrow more money for home improvement projects or other major expenses. | You increase your overall debt, which can add financial stress. |
| You can reduce your monthly payment. | You could reset your loan term, which means you’ll be paying off the loan for longer and pay more interest. |
| You can switch from an adjustable-rate loan to a fixed-rate loan to prevent your monthly payment from changing. | You need to pay closing costs and other fees to refinance the loan. |
| You can extend or shorten the term of your loan. |
Refinance to a home equity line of credit
A home equity line of credit, or HELOC, is a line of credit based on your equity that you can draw on as needed, up to a maximum amount. It works much like a credit card, but with your home securing the debt.
Most HELOCs have an adjustable interest rate, as well as a draw period during which the borrower can draw on the credit line as needed, and a repayment period where no more withdrawals can be made, and the loan is paid back. You also have to pay closing costs of 2% to 5% of the loan amount on a HELOC — comparable to a home equity loan.
“A HELOC is a good idea if you have a variety of hard-to-estimate expenses coming up,” says Martin Orefice, founder of Rent To Own Labs in Orlando, Florida. “The ability to borrow what you need and pay it off when you can is a great way to add some financial flexibility for homeowners.”
Pros and Cons of Refinancing To a Home Equity Line of Credit
| Pros | Cons |
| HELOCs let you borrow only as much as you need. | Your home is collateral for the loan, which can be risky. |
| You have a longer period during which you can draw on the loan amount. | Interest rates adjust and the monthly payment can change, making overall costs difficult to predict. |
| Interest incurs only on funds used rather than the entire loan amount. | You’ll pay more interest if market rates go up. |
Refinance into a new first mortgage
It’s possible to refinance and consolidate your home equity loan and your primary mortgage into a new primary mortgage. This requires you to have enough equity to take out a bigger loan to pay off your current mortgage and your home equity loan in full.
Pros and Cons of Refinancing Into a New First Mortgage
| Pros | Cons |
| Interest rates for first mortgages can be lower. | Whether this option works for you depends on if your existing mortgage rate is lower than what lenders currently offer. |
| You have only one mortgage and one monthly payment. | You increase the amount you owe on your primary mortgage, which could reduce your equity. |
| Refinancing to a fixed-rate mortgage means having predictable monthly payments. | Closing costs can be between 2% and 6%. |
How To Refinance a Home Equity Loan
You’ll need to apply with a lender to refinance your home equity loan and meet their requirements for credit score, income, debts, and equity. You also will need to pay closing costs.
Expect to provide your lender with pay stubs, W-2 forms, bank statements, income tax returns, and other documents needed to refinance to prove you can repay the loan.
Eligibility criteria
Similar to when you applied for your first mortgage, the lender will appraise your home and review your income, expenses, assets, and debts. The lender will calculate your debt-to-income ratio with the estimated payment for the loan you’re applying for.
Credit score requirements
Lenders usually require homeowners to have a credit score of at least 620. Borrowers whose scores are least 740 will qualify for lower interest rates and larger loan amounts.
Loan-to-value ratio considerations
You’ll need to have enough home equity to refinance. Lenders usually won’t let you borrow all of your equity — there’s a limit. It’s usually expressed as a combined loan-to-value ratio, which is calculated by dividing the total of all your home loan balances by your home’s fair market value and multiplying by 100. Most lenders set the maximum CLTV ratio at anywhere from 75% to 90%, depending on other factors such as credit score.
Pros and Cons of Refinancing a Home Equity Loan
It helps to have a basic understanding of interest rates, monthly payments, and how you would access additional funds when deciding, Can I refinance a home equity loan? Once you have that basic understanding, these are some advantages and disadvantages to consider.
Pros of refinancing a home equity loan
Here are some benefits of refinancing a home equity loan.
Lower interest rates
Lower interest rates save you money when refinancing by reducing your monthly payment and the total interest you pay on the loan.
“If current interest rates are significantly lower than the rate on your existing loan, refinancing can help secure a lower rate, potentially reducing monthly payments and saving money over time,” says Minhao “Mike” Qiu, owner of the homebuying company Good As Sold Home Buyers in Seattle.
You also may be able to move from an adjustable-rate loan to a fixed-rate mortgage, which means going from an interest rate that changes to a constant, predictable one.
Potential for lower monthly payments
A refinance can mean your monthly payments will decrease, making it easier to afford your payments and make them on time. Refinancing often resets your loan period, so be sure to run the numbers. Extending your loan term could cost you more in total interest, even as it reduces the monthly payment.
Access to additional funds
Depending on the type of refinance you choose, you can refinance your home equity loan to take out additional cash for home renovations or other major expenses. With a new home equity loan, you’ll have a fixed amount you can access, while a HELOC will offer you a revolving line of credit that you can spend as needed.
Cons of refinancing a home equity loan
Here are some drawbacks of refinancing a home equity loan.
Closing costs and fees
You likely will have to pay closing costs when you refinance, although some lenders offer HELOCs with no closing costs. Closing costs usually include an appraisal fee — your lender will want to know your home’s current market value — credit report fees, filing fees, and title fees. You also may choose to pay discount points that reduce your interest rate, if your refinance offers the option.
Potential for increased debt
When you refinance your home equity loan, a longer loan term can be the cost of lowering your monthly payment. In that case, you likely will pay more interest over the life of the loan. Since you’re essentially taking out a second mortgage, you’re likely incurring more debt.
Alternatives for Refinancing a Home Equity Loan
Refinancing a home equity loan takes time and comes with upfront costs. If your objective is to pay off your loan more quickly, consolidate your debts into a single mortgage, or to improve the terms on your first mortgage, an alternative method for tapping into your home equity may make more sense.
Cash-out refinance to pay off a home equity loan
If you want to turn your home equity into cash, this option may make sense for you. A cash-out refinance replaces your existing primary mortgage with a bigger one, giving you access to cash in the amount of the difference between the two. Homeowners may use the cash to pay off their home equity loan balance and use any remainder for other major expenses.
Consolidating a first mortgage and home equity loan
If you want to refinance both your primary mortgage and your home equity loan, you could consolidate them into a new first mortgage. If interest rates have decreased, this could save you money on interest — and give you one mortgage bill to pay instead of two.
Finding a Lender To Refinance a Home Equity Loan
You’ll need to find a mortgage lender to get a home equity loan refinance. It’s a good idea to shop around and receive estimates on interest rates and closing costs from multiple lenders to ensure you’re getting the best available deal.
“First, you need to shop around and compare rates from different lenders,” says Dennis Shirshikov, head of growth at Awning, a national real estate investing company. “Don’t forget your current lender might offer favorable terms to keep your business.”
FAQ: Refinancing a Home Equity Loan
Here are the answers to common questions about refinancing a home equity loan.
Yes, paying for home repairs and renovations is a common reason why homeowners refinance or take out a second mortgage.
“A home equity line of credit is a good idea when you need home improvements done to your house,” says Kyle Leman, owner of Crossroads Foundation Repair in Lafayette, Indiana. “Using a HELOC to fund home improvement projects can be a wise decision. For those who refinance home equity loans, it could allow you to access the equity in your home and use it to increase the value of your property. Investing in renovations or upgrades can potentially lead to a higher resale value and improve your living experience.”
Most lenders require borrowers to have a credit score of at least 620. Higher scores will unlock lower interest rates and better terms.
A home equity loan can be repaid over anywhere from five to 30 years, depending on the amount you borrow and the terms offered by your lender.
The Bottom Line on Refinancing a Home Equity Loan
Overall, refinancing a home equity loan can offer significant benefits but requires careful research to ensure it’s the right decision for you. It’s important to look at short-term financial gains, how much time it will take to pay off the loan, and how much total interest you’ll pay on the loan.
