Can you refinance a home equity loan?

8 reasons to refinance a home equity loan

Your money situation changes over time. Interest rates go up and down. Home values increase. Credit scores improve. And life brings new expenses.

Refinancing your home equity loan lets you adjust your loan to match where you are today.

Here's when refinancing makes sense:

1. Get a Lower Interest Rate

If rates have dropped since you got your original loan, or if your credit score has gone up, refinancing could lower your interest costs and monthly payment.

Pro tip: Refinancing usually makes sense when you can lower your rate by at least 0.75% to 1%.

2. Lock in Stable Payments

If you have a HELOC (Home Equity Line of Credit), your rate changes with the market. That means your payment can jump around. Refinancing into a fixed-rate home equity loan gives you the same payment every month, making it easier to plan your budget.

3. Access More of Your Home's Value

When your home's value goes up, you build more equity. Refinancing lets you borrow against that extra equity for home improvements, major purchases, college expenses, or other important needs.

4. Lower Your Monthly Payment

Do you need more room for your budget? You can refinance to extend your loan term or get a lower rate. Both options can reduce your monthly payment and free up cash for other goals.

5. Change Your Payoff Timeline

You may want to pay off your loan faster by shortening the term. Or you need lower payments now and don't mind taking longer to pay it off. Refinancing gives you control over how quickly you pay back what you borrowed.

6. Pay Off High-Interest Debt

Credit cards and personal loans often charge interest rates of 15% to 25% or more. You can use your home equity to pay off these balances at a much lower fixed rate. This saves you money on interest and lets you manage just one payment.

7. Combine Multiple Loans

If you're managing both a primary mortgage and a home equity loan, that's two separate payments and due dates to track. A cash-out refinance can roll both into one loan with one payment and possibly a lower overall rate.

8. Avoid a Large Final Payment

Some home equity loans require a large lump-sum payment at the end. If you're not ready to pay tens of thousands of dollars all at once, refinancing spreads that amount into manageable monthly payments.

Should I refinance my home equity loan?

Deciding whether to refinance depends on your current interest rate, your financial goals, and how long you plan to stay in your home.

With home equity loan rates reaching multi-year lows, refinancing could unlock significant savings. However, it's not the right move for everyone.

When refinancing makes sense:

• Lower Interest Rates: If current rates are at least 0.50% to 1% lower than your existing loan, refinancing could reduce your monthly payments and total interest costs.

• Improved Credit Score: If your credit has improved from "fair" to "excellent" since you originally borrowed, you may qualify for significantly better terms regardless of market conditions.

• Payment Stability: Switching from a variable-rate HELOC to a fixed-rate home equity loan provides predictable payments and protects you from future rate increases.

• Access More Cash: If your home's value has increased, refinancing lets you tap into additional equity for larger projects, such as renovations or debt consolidation.

When you should wait:

• High Closing Costs: Refinancing typically costs 2% to 5% of the loan amount. If the fees are $3,000 but you only save $50 per month, it would take 5 years to break even.

• Selling Soon: Planning to move within the next two years? You likely won't recoup your refinancing costs.

• Nearly Paid Off: If you're in the final years of your loan, most payments go toward principal. Refinancing "restarts the clock" on interest, which could cost you more in the long run.

How to refinance a home equity loan

Refinancing a home equity loan means taking out a new loan to replace your old one.

The process is like getting your original loan, but with a focus on your current home value and financial health.

Here's how to do it step by step:

Step 1: Review Your Current Situation

Before you start, ask yourself a few questions:

• Are today's rates lower than what you're paying now?

• Would a smaller monthly payment help your budget?

• Has your home's value gone up since you first borrowed?

• Do you need extra cash for important goals, such as renovations or debt repayment?

Understanding what you want to achieve helps you choose the right refinancing option.

Step 2: Check Your Credit, Equity, and DTI Ratio

• Check Your Credit Score: Aim for 660 or higher. Scores above this level unlock the best rates. While some lenders accept scores as low as 620, stronger credit means better terms.

• Calculate Your Equity: Take your home's current value and subtract what you owe on all mortgages. Most lenders want your Combined Loan-to-Value (CLTV) ratio at 85% or lower. That means you need at least 15% equity in your home.

• Review Your Debt-to-Income (DTI) Ratio: Add up all your monthly debt payments (mortgages, car loans, credit cards, etc.) and divide by your gross monthly income. Lenders prefer this number to be below 43%.

Step 3: Shop Around for the Best Deal

Get quotes from at least three lenders:

• Your current lender

• A local credit union

• Online lenders like Axos Bank

Compare the Annual Percentage Rate (APR), monthly payment, and closing costs.

Step 4: Gather Your Documents

Lenders need to verify your finances. Be ready to provide:

• Income proof: Recent pay stubs (last 30 days) and tax returns (last 2 years)

• Asset information: Bank statements and investment account statements

• Property details: Current mortgage statement, home equity loan statement, and homeowners' insurance policy

• Identification: Driver's license or other government ID

Step 5: Submit Your Application

Once you've chosen a lender, fill out the application. The lender will pull your credit report and review your financial documents.

This process usually takes a few days to a couple of weeks.

Step 6: Get an Appraisal

The lender will order a professional appraisal to confirm your home's current value.

This is important because it determines how much equity you have available.

If your home has gained value since you first borrowed, this works in your favor.

Step 7: Go Through Underwriting

An underwriting specialist reviews your complete financial picture, including your credit, income, debts, and home value.

They're making sure you can afford the new loan and that it meets lending guidelines.

Step 8: Review Your Closing Disclosure

Three days before closing, you'll receive a Closing Disclosure. This document lists your final loan terms, interest rate, monthly payment, and all closing costs.

Compare it carefully to the initial estimate you received. If fees have increased significantly, ask why.

Step 9: Close on Your New Loan

At closing, you'll sign the new loan documents and pay your closing costs.

The new lender then sends money directly to your old lender to pay off your previous home equity loan.

Important: By law, you have three business days after signing to cancel the refinance if you change your mind. This is called "Right of Rescission."

Step 10: Start Making Payments

Once everything is finalized, you'll start making payments on your new loan in accordance with the terms you agreed to. Your old loan is paid off and closed.

Alternatives to a home equity refinancing

Refinancing isn't your only option when you need better loan terms or access to cash. Here are other ways to tap into your home's value or improve your financial situation.

Switch to a HELOC (Home Equity Line of Credit)

A HELOC works like a credit card secured by your home. You get a credit line you can use as needed during a draw period, typically 10 years. Borrow what you need, pay it back, and borrow again if necessary.

Key Features:

• Variable interest rates that change with market conditions

• Interest-only payments during the draw period (though you can pay more)

• Flexible access to funds when you need them

Best For: People who need ongoing access to cash for projects with uncertain timelines or costs, like phased home renovations.

Cash-Out Refinance

A cash-out refinance replaces your entire first mortgage with a new, larger loan. The new loan pays off both your original mortgage and your home equity loan, and you receive the extra amount in cash. This consolidates everything into one monthly payment.

Key Features:

• Single loan with one monthly payment

• Fixed or variable rate options available

• May have a lower rate than your home equity loan alone

Best For: Homeowners who want to simplify their finances with one payment, especially if current mortgage rates are competitive with their existing first mortgage rate.

Personal Loan

Personal loans don't use your home as collateral. They're unsecured loans based on your credit and income. The application process is typically faster and simpler than home equity products.

Key Features:

• No appraisal or home evaluation required

• Faster approval and funding, often within days

• Fixed rates and predictable payments

• Loan amounts typically range from $1,000 to $100,000

Best For: Smaller borrowing needs or situations where speed matters more than getting the lowest possible rate.

Making your home equity work for you

Your home is likely your largest financial asset.

Whether you choose to refinance your existing home equity loan or explore alternative options, the key is finding a solution that aligns with your current financial situation and future goals.

Refinancing makes the most sense when you can secure meaningfully lower rates, reduce your monthly payments, or access additional equity for important financial priorities.

But it's not a one-size-fits-all solution. Take time to calculate your break-even point, compare multiple offers, and consider how long you plan to stay in your home.