Can You Refinance a Home Equity Loan?

Yes, it’s possible to refinance a home equity loan, use it to pay off the old one, and repay the new loan on its new terms. Whether it’s worth it depends on the rate you’d get today, how much you still owe, and what the new loan costs to open. Rates and fees vary widely among lenders, so compare at least three offers before you decide.

How refinancing a home equity loan works

You’ll need to qualify again, just like you did the first time. The good news is you can shop around first. Many lenders offer prequalification, which gives you a rough idea of your rate using a soft credit check that doesn’t affect your credit score.

1. Talk to your current lender first

Your current lender already has your information on file and may offer a lower rate to keep your business.

Ask for your loan officer or the home lending team directly, since they’re the ones who can adjust your terms. The general customer service line usually can’t.

2. Get at least two more quotes

Don’t assume your lender has the best deal just because they hold your loan. Someone else may beat it, especially if your credit is stronger now than when you first borrowed.

Be sure to compare different kinds of lenders, like a bank, a credit union, and an online lender. They don’t all price loans the same way, so rates and fees can vary a lot.

3. Get your documents together

Most lenders ask for the same things, so pulling them together once can save you time, including:

• Proof of what you earn. Recent pay stubs, or your last two tax returns if you work for yourself.
• Your current loan info. Your balance, your rate, and any fee for paying it off early.
• Home documents. A recent mortgage statement and proof of homeowners insurance.

The lender will also likely order a new home appraisal, though some may skip it if they can confirm your home’s market value using automated data models.

4. Keep your applications close together

Once you have your top picks, submit the full applications within about two weeks. Each one adds a hard credit check, which typically takes a few points off your score.

But scoring models expect you to compare home loan offers. If you keep your loan shopping within a window of 14 days (or up to 45 days with newer FICO versions), the credit inquiries count as one for scoring. You won’t know which version a lender uses, so two weeks is a safe window.

You have three days to change your mind. Federal law gives you three business days to cancel a cash-out refinance on the home you live in for any reason, with no penalty. The CFPB calls it the right of rescission. Cancel in writing before midnight of the third business day, and the lender has 20 days to return your fees and release the claim on your home. Note that it cancels the new loan, not your original mortgage.

Reasons to refinance a home equity loan

• Lower your interest rate. This is the most common reason. If rates have come down since you first borrowed, or your credit is in better shape now, a new loan may offer a lower rate. Add up your closing costs first, because they can eat into a small rate drop.
• Reduce your monthly payment. Stretching your loan’s balance over more years lowers what you owe each month. It also means paying interest for more years, so the loan costs more overall.
• Switch from a variable rate to a fixed rate. If you have a HELOC with a variable rate, refinancing to a home equity loan locks your payment. You can also ask your current HELOC lender to “fix” your variable rate to a fixed rate, if they offer this option.
• Switch from a fixed rate to a credit line. Going the other way, refinancing a home equity loan into a HELOC lets you draw money as you need it instead of taking another lump sum. HELOC rates move with the prime rate, so your payment can change from one month to the next.

Read more >> How to Get Equity Out of a Paid-Off Home

Requirements to refinance a home equity loan

Alternatives to refinancing a home equity loan

• Cash-out refinance on your primary mortgage. This rolls your first mortgage and your home equity loan into one new loan, resetting rates and terms on the whole mortgage. It can simplify things, but it only makes sense if today’s rates are close to or below your current mortgage rate, because closing costs can run into the thousands of dollars.
• Loan modification. If you’re having trouble making payments, your lender may agree to change your loan’s terms instead. Call your loan servicer before you miss a payment.

Read more > Cash-Out Refinance vs. Home Equity Loan: What's the Difference?

‍Struggling with the payment? Read this first. Falling behind on this type of loan risks losing your home to foreclosure, so a refinance is worth more scrutiny than the rate alone. A HUD-approved housing counselor can review the numbers with you for free, telling you whether refinancing is the right move or whether something else fits better. Call 800-869-4287 or search HUD’s counselor directory.

When refinancing a home equity loan may not be worth it

• Your balance is small. Closing costs can run 2% to 5% of the loan, and on a small balance, the rate savings may never catch up.
• You’re close to paying it off. Near the end of a loan, most of each payment already goes toward principal, not interest. Taking out a new loan starts that schedule over, so you could end up paying more interest overall.
• Your loan has a prepayment penalty. Some lenders charge a fee for paying off a loan early, usually within the first three years. Your original loan documents should say whether you have one and when it ends.
• Your credit is weaker than it was. If your score has dropped since you borrowed, the new rate may be worse than your current one.

Bottom line

Refinancing a home equity loan can make sense when the rate you’d save is bigger than what the new loan costs to open. Your credit decides much of that, because lenders price the rate partly on your score.

If you’re not in a hurry to refinance, Kikoff’s Credit Account reports your on-time payments to Equifax, Experian, and TransUnion, adding to the payment history credit bureaus track and lenders look at. There’s no credit check to sign up, and plans start at $5 a month.