Home Equity Loan Refinance: How Does It Work?

A home equity loan refinance is not only possible but relatively common when interest rates drop. While a home equity line of credit (HELOC) or a home equity loan offers homeowners the option to access the equity they've built up in their home. A cash-out refinance can give you access to some of the equity you've built up in your home, while a refinance can help you save on interest. Learn the pros and cons, plus how to refinance your home equity loan here. 

Can You Refinance a Home Equity Loan? 

Home equity loans and HELOCs are both types of financial tools that allow you to adjust payment terms or draw on the equity in your home for repairs, home improvements or other financial needs. You can refinance a home equity loan. It's a good idea to refinance if interest rates have dropped substantially.  

How Does Refinancing a Home Equity Loan Work

Refinancing a home equity loan follows a similar process to applying for a home equity loan. You'll want to compare interest rates, apply to multiple lenders and choose the lender with the best offer, including annual percentage rate (APR) and repayment terms to meet your needs. 

You can replace your existing home equity loan with a new one that’s the same size or larger if you have enough equity. 

Say you have an existing home equity loan worth $50,000, your home is worth $400,000 and you have a balance of $200,000 remaining on your first mortgage. Your debt totals $250,000. To get your combined loan-to-value (CLTV) ratio, divide $250,000 by $400,000. The result is 62.5%, which makes your home equity 37.5%.

While you could borrow up to 80% The less equity you borrow against, the lower your interest rate could be. Some lenders may require a CLTV no higher than 60% or 70% to give you the lowest interest rate. In the example above, assuming you don't take out additional equity and that you have a good credit score, you could be eligible for a lower interest rate. 

Reasons to Refinance a Home Equity Loan

There are many reasons to refinance a home equity loan. The most common are:

• Lower interest rates: If interest rates have dropped, refinancing can lead to significant savings in monthly payments and total interest. 
• Change loan terms: You could make loan terms shorter or longer. With a shorter term, you'll pay a higher amount but pay off the loan faster. With a longer term, you'll reduce your monthly payments. 
• Take out more equity: A cash-out refinance could help you access more equity from your property. 

Pros and Cons of Home Equity Loan Refinance

Here are the pros and cons of a home equity loan refinance: 

Pros

• Potentially lower interest rates
• Lock in a rate and avoid unwanted variability with a fixed-rate refinance
• Pay off your home equity loan faster with a shorter term
• Reduce monthly payments with a longer term
• Access more equity if you need more cash than originally anticipated 

Cons

• Pay 2% to 5% in closing costs
• If you switch from an adjustable rate to a fixed rate, you could lose out if rates come down
• Original home equity loan may have a prepayment penalty

Requirements for Eligibility

To refinance a home equity loan, you'll need to meet lender-specific financial requirements, including:

• A credit score of at least 620 (in most cases) — a credit score of 700 or higher can help you get better interest rates 
• A debt-to-income ratio (DTI) of 43% or less 
• At least 20% equity in the home 
• Proof of income, including pay stubs, W-2s, bank statements and tax returns
• Proof of up-to-date mortgage payments and proof of home insurance

How to Refinance a Home Equity Loan

Below is a step-by-step explanation of refinancing a home equity loan.

Determine Your Goals for Refinancing

Your goals will dictate the best home equity loan for your needs. Consider all your needs before applying for a home equity loan refinance. For example:

• Do you need a cash-out refinance? 
• Are you searching for a lower interest rate?
• Do you want to shorten or lengthen loan terms?

Gather Necessary Documents

You'll need to prepare all the necessary documents to apply for a refinance, similar to an original mortgage loan. You'll need:

• Government-issued ID such as state ID, driver's license or passport
• Proof of income and assets, including pay stubs, W-2s, tax returns and bank statements
• Proof of up-to-date payments on the existing mortgage
• Proof of home insurance
• Any lender-specific requirements

Compare Loan Offers From Different Lenders

You should apply to a minimum of three lenders. If multiple lenders pull your credit score within a 45-day period, it will only count as one hard credit check on your credit score. 

Choose the Best Option and Submit Your Application

Carefully compare the lenders’ offers, including repayment terms, annual percentage rate (APR) and fees. Once you decide which lender has the best terms for your needs, you can submit your application for a home equity loan refinance. 

Close on Your New Refinance Loan

Once you've submitted all the loan documentation, you'll need to wait for the lender to complete the underwriting process. You can usually close on a home equity loan refinance within a few weeks, but in some cases may take a month or longer. 

Pay Off Your Existing Home Equity Loan

Once the home equity loan refinance is approved, you'll receive a lump sum and can pay off your existing home equity loan. Then, you'll need to make monthly payments on the new home equity loan. 

Compare the Best Mortgage Recast and Refinance Companies from Benzinga’s Top Lenders

You can find some of the best mortgage recast and refinance companies here, starting with Point.com, a platform that helps you use your home equity without taking out a loan or incurring a monthly payment. You sell Point.com a portion of your future home appreciation in exchange for cash you can use however you like, making the process simpler for families that need to manage debt or handle unexpected expenses.

Should You Refinance Your Home Equity Loan?

Whether you should refinance depends on your financial situation and the wider market. If you need to access more cash from the equity in your home, a cash-out refinance can be a good solution. Likewise, if interest rates have dropped substantially, locking in a lower interest rate can help you save more. You can also learn about a first-lien HELOC or how to use a HELOC to pay off your mortgage. 

Frequently Asked Questions