Can You Refinance a Home Equity Loan?

Table of Content

• New Home Equity Loan
• How Are Home Equity Loan Refinance Rates Determined?
• Home equity loans vs. cash-out refinances
• Pros and Cons of Refinancing a Home Equity Loan
• What do you want to do with money?
• Refinancing Your Home Equity Loan: A How-to Guide
• Home Equity Loan vs. Cash-Out Refinance When Your Home Is Paid Off

A personal loan can be used for just about anything, including paying off your HELOC. You can close out your HELOC with a Discover© personal loan so that you can secure a fixed rate and don’t have to deal with fluctuating interest rates. A 125% loan, often used in mortgage refinancing, allows homeowners to borrow more money than the equity they have in their property. Home equity loans, by contrast, use your equity as collateral for an entirely new loan.

As long as you meet the lender’s qualifications, you can get a new loan. When you use all your equity to back loans, you’ll no longer qualify for another. Factor in the closing costs and other fees when you're trying to calculate how much money you'll save. Those fees might negate any monthly savings if you sell your house before at least reaching a break-even point. For example, when the Federal Reserve changes the federal funds rate, the prime interest rate typically increases. With a new home equity loan, your new loan pays off the old one, and you get a new interest rate, term, and monthly payment.

New Home Equity Loan

In addition to Investopedia, she has written for Forbes Advisor, The Motley Fool, Credible, and Insider and is the managing editor of an economics journal. If you don't have enough equity to qualify for a refinance loan, you might be able to get a personal loan. You can use a mortgage consolidation to roll your first and second mortgages into one new loan so you no longer have to make separate payments for each. This can make it easier for you to manage your payments each month, and if you consolidate with a loan that has a lower interest rate, you can save money over time. Compare the interest rates, terms, and fees of different loans before choosing the best refinance option for your home equity loan.

Even if you have bad credit, you can still get a home equity loan, with or without refinancing. Here’s what you should do before you get home equity, whether you’re refinancing, selling, or have bad credit. If the amount you are borrowing is sufficiently large, a cash-out refinance could cost you less in interest and fees than a home equity loan. But now you have a massive home repair project and not enough ready cash to cover it. For example, if you recently bought a home at $500,000 and paid a 20% down payment, which is $100,000, your home equity stands at $100,000. Let’s say your home’s market value is $350,000 and, your remaining mortgage is $150,000, your home equity is $200,000.

How Are Home Equity Loan Refinance Rates Determined?

That’s because the primary lender is the first to be repaid through sale proceeds if the home is foreclosed—so the home equity lender has added risk. You find a lender who generously offers 80% LTV financing – or, in other words, requires a 20% down payment from you. You could cough up the cash, or you could offer to cross-collateralize your home. In areverse mortgage, the lender pays the borrower rather than vice versa, with no obligation for the homeowner to make payments while they live. Upon their death, the house goes to the lender unless the borrower or their estate pays off the balance. Also, HELOC interest rates are typically lower than credit cards’ since they’re secured by your home.

While a cash-out refinance may be the right tool for some homeowners, it’s not the only option out there. Home equity debt is not a good way to fund recreational expenses or routine monthly bills. However, it can be a real lifesaver for anyone saddled with unexpected financial challenges. The key is to make sure that you borrow at the lowest possible interest rate—and keep in mind that borrowers who do not repay these loans can lose their homes in foreclosure.

Home equity loans vs. cash-out refinances

Unlike the other two forms of secondary home loans, HELOCs usually come with no closing costs. Also, HELOCs have adjustable rates that vary with the prime rate, meaning that your rate could rise or fall over the life of the loan. HELOC rates are often discounted at the beginning of the loan term and then increase after six to 12 months. Lenders use a calculation called “simple interest amortization” to determine how much of each monthly payment goes toward interest and how much goes toward paying down your principal balance. At the beginning of your loan term, nearly all of each payment goes toward interest, rather than principal. Over time, that ratio changes, until at the very end of your loan term, nearly all of each payment goes toward paying down your principal balance.

Many people instantly picture having to sell their primary property and move when they consider pulling equity out of a home with terrible credit, without refinancing, or by selling. Many people are drawn to homeownership because of the chance to accumulate equity. After all, it serves as the ultimate financial safety net and resources available without the need for a personal loan.

The LTV ratio is computed as a percentage by dividing your outstanding loan total by the current worth of your home. Taking out a home equity loan when you don't have a mortgage is very similar to taking one out when you do have a mortgage. Before you do, however, compare the alternatives, such as a home equity line of credit or cash-out refinance. You'll also want to make sure you understand the risks involved and that you're taking out a home equity loan for sound financial reasons.

An equity sharing agreement allows you to convert the equity in your home into cash without accumulating extra debt. The investor will buy a share of your home’s equity based on the current market value at the end of the chosen term, typically 10 to 30 years. You may also have the option to sell your home or refinance when your term expires. The difference between these phases can get homeowners into a bit of hot water, as the full payment can put a significant financial burden on borrowers. Before we explore how to get equity out of your home without refinancing, let’s first explain what home equity is. Home equity is the difference between a home’s value and the amount owed on the home.

Your capacity to repay the new HELOC or loan will be based on your income and debts. Some lenders prefer to see that your mortgage debt does not exceed 28% of your gross income and that your total debt should not be more than 36% of your gross income. Each lender has their own debt-to-income guidelines, but these are good rules of thumb for you to assess your own ability to repay a new loan or line of credit. Postpones the financial burden of making large payments during the repayment period. You do not have to pay income taxes on the money you get through a cash-out refinance.

With a lower interest rate and/or longer loan term, you may be able to reduce your monthly payment or borrow more without significantly increasing it. Many lenders will pay most or all of your closing costs on a home equity loan unless you pay it off early, within the first 36 months. In that case, you may have to reimburse the lender for a prorated portion of the closing costs that it paid on your behalf. Most lenders will allow you to borrow anywhere from 15% to 20% of your home's available equity. To calculate your home equity, subtract your remaining mortgage balance from the current appraised value of your home. How much equity a bank or lender will let you take out depends on a number of additional factors such as your credit score, income and DTI ratio.

Once you find a lender to work with, you’ll need to apply for the refinance. As part of this process, you’ll need to provide documentation that proves you make enough money to make the monthly repayments. You'll likely also need to have your home appraised to make sure you have enough equity.

But if you want to leave something behind for your children, be careful about how a reverse mortgage will impact your estate planning. If the home loses value, you'll pay back the equity you drew, less an adjustment for the depreciation. Appraisal will determine the value of the home, but that value may be discounted by the investor for risk purposes.

Refinancing Your Home Equity Loan: A How-to Guide

Cash-out refinances are attractive for borrowers seeking to lower their interest rate while also taking cash out of their home. However, interest rates are rising to the highest levels in more than a decade so there will be fewer borrowers who can refinance into a rate lower than the one they currently have. Generally, borrowers have 20 years to repay their HELOC and the interest rate usually switches from an adjustable-rate to a fixed-rate structure once you enter the repayment phase. Cash-out refinancing allows you to access your home equity through a first mortgage instead of a second mortgage, like a home equity loan or line of credit. Before the agreement’s term ends, perhaps by qualifying for a cash-out refinance with another lender, if the agreement allows refinancing.

A cash-out refinance effectively pays out some of the equity in your home as cash—you emerge from the closing with a new mortgage and a check for cash. Cash-out refinancing and home equity loans both provide homeowners with a way to get cash based on the equity in their homes. The gain comes from $193,600 in appreciation and $31,300 in principal payments. With loan costs rising to their highest levels in more than two years, time may have run out on many homeowners thinking about refinancing. But some may still be able to find some money in the equity they’ve built up in their homes. The loan-to-value ratio is a lending risk assessment ratio that financial institutions and other lenders examine before approving a mortgage.