Refinancing home equity loans: Everything to know
High interest rates are putting many homeowners in tough situations.
Perhaps you took out a home equity loan as real estate prices rose, but now you're struggling to make repayments as your other expenses have gone up. Or maybe you want to borrow money to renovate your home rather than take on a new, high-interest-rate mortgage by buying a new house, yet you're put off by current home equity loan interest rates.
Whatever your situation may be, it could be helpful to know what your options are for refinancing home equity loans. Perhaps you want to improve your current home equity loan situation, or you want reassurance that if you do take out a home equity loan soon, you're not necessarily locked into a high rate for the life of the loan. Start by exploring your home equity loan options here now to see what rates you're eligible for.
Refinancing home equity loans: Everything to know
If you're curious about a home equity loan refinance, consider the following:
Can you refinance a home equity loan?
Yes, home equity loans can typically be refinanced. That's not to say that everyone will qualify for refinancing at all times, but it's generally possible to refinance a home equity loan, much like first mortgages can be refinanced.
Why would you want to refinance a home equity loan?
Refinancing a home equity loan could potentially improve your financial situation. One of the more obvious reasons to refinance is if doing so means you can lower your interest rate.
"It's all about paying less interest over the lifetime of a loan. Borrower demand for refinancing loans, be it mortgage or home equity, goes up whenever interest rates drop or when an individual borrower's credit score improves," says Dan Richards, EVP of Mortgage at Flyhomes.
In other cases, people might refinance to change "the terms on a loan, like the length of the repayment period, or tapping into additional equity," he adds.
How do you refinance a home equity loan?
If you've ever refinanced a traditional mortgage, then you'll be familiar with refinancing a home equity loan.
It's the same process, says Melissa Cohn, regional VP of William Raveis Mortgage. "You complete the application, provide documentation of income, assets, and liabilities, and get an appraisal."
Keep in mind that refinancing typically still requires you to stay below a maximum of around 80-85% combined loan-to-value ratio. "This means that the total of the borrower's outstanding mortgage balances shouldn't exceed that range," says Richards.
When is it worth refinancing a home equity loan?
Refinancing a home equity loan could be worth it if it saves you money. Cohn predicts that rates will settle down later this year or next year, so it's possible the economics would be in your favor then, depending on your initial home equity loan terms.
It's also possible that refinancing improves your situation in the sense that it gives you more manageable monthly payments or more cash if you've built up additional equity. But the cost of refinancing plus the overall risk of debt means the decision should not be taken lightly.
"Borrowers should be selective about when they refinance their home equity loan. The best times are when they've built up a large amount of equity or when interest rates drop significantly," says Richards.
When is it not worth refinancing a home equity loan?
Not everyone benefits from refinancing a home equity loan. If you took out a home equity loan when rates were low a couple years ago, it might not make sense to refinance for a while.
Even if interest rates are lower than your current home equity loan, that still doesn't mean it's always a good financial move.
"It comes down to math. Borrowers need to determine how long it will take them to cover closing costs and any other fees associated with refinancing. It is not worth refinancing if these additional costs cancel out the savings of the new monthly payment," says Richards.
Timing can also be a factor.
"If you plan to repay the home equity loan quickly, it is generally not worth refinancing," says Cohn.
The bottom line
With interest rates looking like they may start to come down in the not-too-distant future, homeowners may be interested in refinancing their home equity loans. But it's important to compare any new loan terms to your existing ones, along with looking at the cost and time involved in refinancing, before making your decision.
If refinancing a home equity loan doesn't seem like a good fit, but you're still interested in tapping into more of your home equity, other financing options like a home equity line of credit (HELOC) or a cash-out refinance could also be worth considering. Explore your mortgage refinancing options here now to see if that's a better fit for you.
