- Refinancing a home equity loan may help you lower your interest rate or adjust your repayment terms, which might lead to lower monthly payments. It might also help you access more of your home’s equity.
- You can replace your current home equity loan with a new home equity loan, switch to a revolving home equity line of credit (HELOC), or use a cash-out refinance to access more funds for home improvement projects, debt consolidation, or large expenses.
- To qualify for a home equity loan refinance, you need to meet specific criteria related to home equity, credit scores, income, and payment history.
Home equity loans are useful tools for homeowners. They allow you to borrow against your home equity to make large purchases, finance home renovations, or even consolidate debt.
However, some homeowners find that after some time, the terms of their home equity loan no longer serve them as they initially did. Perhaps interest rates have declined, but the homeowner’s home equity loan is locked in at a higher rate from a few years ago. Or maybe the homeowner is ready to borrow more for a new project or purchase. Or perhaps the homeowner is struggling to afford the payments on their original home equity loan and is looking to lower their monthly payments by extending their loan terms. These are just a few reasons why a homeowner may want to consider refinancing their home equity loan.
Can You Refinance a Home Equity Loan?
Yes, home equity loans can be refinanced.[1] Refinancing your home equity loan means replacing your current loan with another. There are multiple ways to refinance a home equity loan, depending on your financial goals.
In this article, we will explore home equity loan refinancing, explaining why it can be beneficial, how it can be done, and what it takes to qualify.
Reasons To Refinance Your Home Equity Loan
There are several compelling reasons to refinance a home equity loan, including:
- Lowering your interest rate. If interest rates have come down since your home equity loan was originated (or you have improved your credit score to qualify for a lower rate), you may be able to secure a lower interest rate, which could reduce your monthly payments as well as your total interest expense.
- Lowering your monthly payment. Securing a lower interest rate or extending your repayment term could reduce your monthly payment.
- Accessing more of your home equity. By refinancing a larger loan amount, you could pay off your existing home equity loan and have cash left over for major purchases, home improvement projects, or paying off other debts.
Ways To Refinance Your Home Equity Loan
There are three primary methods of refinancing your home equity loan:[1]
- Refinancing with a new home equity loan
- Switching to a revolving home equity line of credit
- Using a cash-out remortgage refinance to pay off your home equity loan
Here is a closer look at each of these options.
Refinancing with a New Home Equity Loan
You can pay off the balance of your current home equity loan with a new home equity loan. If you can secure a lower interest rate, you can reduce your total interest expense, as well as your monthly payment (assuming that the loan amount isn’t increased or the loan term decreased by enough to warrant a monthly payment increase).
Even if you cannot secure a lower interest rate, you may be able to reduce your monthly payment by extending the loan term with a new home equity loan. Spreading the current balance over more monthly payments can reduce the amount of each payment, even with a higher interest rate. It’s important to understand, however, that this would increase your total interest expense over the life of the loan.
Switching To a Home Equity Line of Credit
HELOCs are similar to home equity loans in that both financial tools allow you to borrow against your home equity, using your home as collateral for the loan. Unlike home equity loans, HELOCs are revolving credit lines, which means you can borrow against a pre-approved maximum amount during a set draw period (similarly to using a credit card). This flexibility allows you to borrow enough to pay off your home equity loan, then repay the HELOC balance over time, while retaining the possibility of borrowing against available credit, without having to apply for a new loan.
HELOCs also offer flexible repayment terms. Some lenders even offer interest-only payments for the first few years, which can dramatically reduce your payments in the short term, while deferring the larger payments to the future. While HELOCs have traditionally been adjustable-rate loans (meaning that the interest rate can change based on market changes),[2] some lenders now offer HELOCs with rate locks, which allow you to “lock in” a fixed rate. This can provide more predictability to your monthly payments.
It’s worth noting that HELOCs can also be refinanced. Learn more about refinancing a HELOC.
Using a Cash-Out Refinance To Repay Your Home Equity Loan
If you want to restructure your entire mortgage while refinancing your home equity loan, a cash-out mortgage refinance may be a good option for you.
Rather than only applying to your home equity loan, a cash-out refi loan refinances your primary mortgage for more than the amount owed, allowing you to access the difference in cash (minus any closing costs), which you can use to repay your home equity loan in full. This would remove the home equity loan as a second mortgage, allowing you to focus your repayment efforts on the primary (first) mortgage.
Cash-out refinancing may be most beneficial when you can secure an interest rate lower than the rate on your current primary mortgage. The lower interest rate can help offset the monthly cost and overall interest expense of increasing the principal loan amount.
Pros and Cons of Refinancing a Home Equity Loan
Possible advantages of refinancing a home equity loan include:[1]
- Lower interest rates. Lower interest rates can reduce your monthly payments and the total interest expense over the life of the loan.
- Lower monthly payments. Lower monthly payments can be achieved through a lower interest rate or by extending the loan term, which would spread the balance across more payments.
- Different repayment terms. A shorter repayment term can help you get out of debt faster and save money on interest expenses, while a longer repayment term can reduce the monthly amount due.
- Access additional funds. By refinancing, you may be able to convert more of your home equity into funds that you can use to achieve your financial goals, like debt consolidation, making home improvements, or financing a large purchase
- Potential downsides of refinancing a home equity loan include:[1]
- Closing costs. New loans (including refinances) can incur fees for the work needed to originate the loan (such as origination fees charged by some lenders for processing the refinance transaction and the cost of the appraisal needed to confirm the value of the property). If you are concerned about your ability to pay closing costs, ask your lender about a no-closing-cost refinance, which could either roll the costs into the loan amount or exchange the closing costs for a slightly higher interest rate.
- Prepayment penalties. Some loans come with prepayment penalties for paying off the loan ahead of schedule (as a refinance would do). Check your current home equity loan to see if you would need to factor pre-payment penalties into your decision to refinance.
- Market factors could reduce your equity. If home values dip due to market conditions, it is possible to owe more on the home than the home is worth. This is known as being underwater on a mortgage, and the more you borrow against your home equity, the greater this risk becomes. However, there are some safeguards in place to prevent this. Lenders, for example, typically require homeowners to maintain a fair amount of equity in their homes (such as 15 or 20% of the property value) when refinancing.
How To Qualify To Refinance Your Home Equity Loan
To qualify for a home equity loan refinance, borrowers may need the following:
- Sufficient home equity. If home values have declined or you plan to cash out more of your home equity, it’s important to pay attention to your lender's loan-to-value (LTV) ratio limits. LTV is the amount of financing on your home as a percentage of the home’s value. For example, if a lender has an LTV limit of 80%, they will only allow you to mortgage up to 80% of the property’s current value.
- A good credit score. Credit scores show lenders how well you have managed debt. Since refinancing involves issuing a new loan, lenders may review your credit score to determine if there is cause for concern regarding repayment. Requirements vary by lender and product type, but it is common to see minimums of 620 for mortgage-related products.[3]
- A reasonable debt-to-income (DTI) ratio. DTI measures your debt obligations as a percentage of your income to determine affordability. While requirements vary by lender, a lower DTI typically indicates greater affordability. For example, your lender may want your mortgage payment to be 28% or less of your pre-tax income.
- A history of on-time mortgage payments. Multiple late payments or missed payments may disqualify a borrower from refinancing.[1]
When Does It Make Sense To Refinance a Home Equity Loan?
In general, it makes sense to refinance a home equity loan when:[1]
- Interest rates have gone down, and you can save money by refinancing to a lower rate.
- You would like to borrow more money against your home equity to fund renovations, debt consolidation, or other expenses.
- You are interested in replacing your current home equity loan with a more flexible revolving home equity line of credit.
- You are struggling to cover the current monthly payments, and refinancing to a longer repayment term could reduce the monthly amounts due. While this could increase the total interest expense, it could also help to ease the near-term financial stress.
Final Thoughts on Refinancing a Home Equity Loan
Refinancing a home equity loan might potentially help you save money or put you in a stronger position to reach your other financial goals. But there may be costs and potential risks associated with refinancing, so it’s important to weigh the pros and cons before moving forward with a home equity loan refinance.
The property securing the CHELOC must be located in a state where PNC offers home equity products. PNC does not offer the CHELOC product in Alaska, Hawaii, Louisiana, Mississippi, Nevada and South Dakota.
