Fact-checked by Peter Warden.
So, you used a home equity loan to consolidate debt, pay for home improvements, or make a down payment on a second home.
That was smart since leveraging your home’s value to borrow money can save thousands in finance charges.
But now you’ve spent the loan’s proceeds. You’ve achieved the loan’s goal. All that’s left is the loan’s monthly payment — a payment that seems like it’ll be with you for years.
Refinancing the home equity loan could help pay off this debt sooner and pay less interest along the way.
Key Takeaways:
- Home equity loans can be refinanced.
- The best home equity loan refinances save more money than they cost.
- Saving money with a refi depends on interest rates, closing costs, and loan terms.
- Comparing rates and fees from several lenders creates the best way to save.
Qualifying to Refinance Your Home Equity Loan
Refinancing a home equity loan means replacing your existing home equity loan with a new one. For this to work, you — and your home — must qualify for the new loan.
Does Your Home Qualify?
First, let’s see whether your home qualifies for more equity-backed financing. This depends mostly on your current equity position.
If your home’s value has increased since you took out your current home equity loan — and if you’ve also been making all the payments on the loan, reducing its balance — there’s a good chance you have enough equity to refinance.
How to Calculate your CLTV
To find out your equity position for sure, calculate your home’s combined loan-to-value ratio (CLTV):
- Add up all the mortgage debt on your home. This includes your primary mortgage balance and any second mortgage loan balances.
- Compare this combined mortgage debt to your home’s value.
Typical lenders won’t approve a loan if it pushes CLTV past 80% to 85%.
A CLTV Example
It’s easier to see how CLTV works in this example:
- Home value: $400,000
- Primary mortgage balance: $200,000
- Home equity loan balance: $50,000
With these numbers, we can calculate CLTV in two steps:
- Divide the combined mortgage debt ($250,000 for both loans combined) by the home value ($400,000).
- Multiply the answer by 100.
In this example, the combined mortgage debt is $250,000, which is 62.5% of the home’s $400,000 value. This home would fall well below the typical maximum CLTV of 80% to 85%, so it would have plenty of room for more financing.
In fact, this homeowner might choose to get more cash back from equity by refinancing into a larger home equity loan or by using a cash-out refinance to combine both loans into one. More on that later.
On the other hand, if this same homeowner owed $250,000 on the primary mortgage and another $90,000 on the home equity loan, the combined mortgage debt would be $340,000 — 85% of the home’s $400,000 value. Many lenders wouldn’t approve a refinance in this case.
Do You Qualify as a Borrower?
Having enough equity to support a refinance clears the first hurdle. Next, you’ll need to qualify as a borrower. Just like a primary mortgage, this depends a lot on credit score, income level, and current debt load.
- Credit score: Your credit score shows lenders whether you’re likely to repay the loan. Requirements may be higher for home equity loans than for primary mortgages. Some home equity lenders want to see scores of 680 or higher. Scores above 720 qualify borrowers for the best interest rates.
- Income and debt: Your income and debt show lenders whether you can repay the loan. Lenders compare income to existing debt to determine your debt-to-income ratio (DTI). Most lenders want to see DTI at 43% or lower for home equity loans.
Homeowners with enough equity and solid borrowing credentials should qualify for a home equity loan refinance.
How to Find the Right Lender
Different lenders have different strengths and weaknesses. The ideal lender is one whose strengths align with the borrower’s needs.
For example, some lenders look more favorably on borrowers whose monthly debt loads exceed DTI rules — if the borrower also has pristine credit to compensate for the risk associated with the higher DTI. A borrower whose financial life matches this profile should get a good deal from this lender.
Loan shoppers who get only one quote from one lender usually miss out on this kind of deal. Instead, they might be glad they got approved at all, not knowing another lender would have viewed their situation more favorably.
Getting home equity refinance offers from three to four lenders increases the odds of finding the perfect fit.
How Often Can You Refinance a Home Equity Loan?
You can refinance a home equity loan any time a lender approves you for a new loan, but this doesn’t mean you should refinance.
Refinancing costs money upfront in the form of closing costs, which include appraisal fees, lender’s fees, and legal fees. While you typically pay these costs upfront, the savings from a refinance accumulate gradually over the course of years.
For example, a loan that costs $2,000 upfront and saves $100 a month would need 20 months of payments—more than a year and a half—to break even. Most borrowers should break even on a refinance before replacing it with another loan.
That said, if mortgage rates drop significantly, borrowers may be OK abandoning their current loan early to amplify their savings over the coming years. The bottom line: make informed choices about costs and savings before refinancing.
Options for Refinancing Your Home Equity Loan
Ready to refinance your home equity loan debt? You have several options:
Refinancing into Another Home Equity Loan
Homeowners can replace their existing home equity loan(s) with a better one. For this to work, the new loan has to improve on the old one. Upgrades can include locking in a lower interest rate, making lower monthly payments, or owing less lifetime interest.
- Pro: Home equity loans typically feature fixed interest rates and payment amounts, which makes comparing loans easier.
- Con: Be careful when extending a loan term farther into the future. Though it lowers monthly payments, this strategy can increase the total cost of interest in the long term.
Refinancing into a new home equity loan works best when borrowers want a simple way to lower their loan rate.
Refinancing Using a Cash-Out Refinance
Cash-out refinancing combines two or more smaller mortgages into one larger mortgage — while also generating cash back.
Here’s a scenario: you have a $50,000 home equity loan and a $150,000 primary mortgage, each with its own monthly payment. A cash-out refi would combine these two loans into a $200,000 mortgage with only one payment. Plus, if the house is worth, say, $300,000, you’d have enough equity to add another $40,000 in cash back. This cash could be used for any purpose.
- Pro: You can simplify mortgage debt by consolidating multiple loans into one while also generating more cash.
- Con: A large loan amount requires higher closing costs.
Cash-out refinancing works best when the new loan improves your position on both the home equity loan and the primary mortgage.
Refinancing into a HELOC
HELOCs (home equity lines of credit) harness home equity to secure a credit line. HELOCs feature a credit limit and allow homeowners to withdraw funds up to that limit while only paying interest on that month’s balance.
A home equity loan borrower could open a HELOC and transfer the home equity loan’s balance to the HELOC.
HELOC balances can be paid down and re-used during the credit line’s draw period. This means homeowners could re-use the loan after paying down some or all of its initial balance. After the draw period ends, usually within 10 years, the remaining loan balance is cemented into a traditional loan with regular payments.
- Pro: HELOCs often charge lower monthly payments that repay only interest during their draw periods.
- Con: A HELOC’s variable interest rate and its fluctuating balance create irregular payments. The interest rate changes with market conditions, meaning it could increase.
Refinancing into a HELOC works best for homeowners who plan to pay off the initial home equity balance and then reuse the credit line for another project.
Refinancing with Your First Mortgage
Refinancing a home equity loan with your primary mortgage resembles cash-out refinancing: You combine two loans into one.
But, unlike a cash-out refi, the new loan pays off both mortgages without generating cash back.
Here’s a scenario: if you have a $150,000 primary mortgage balance and a $50,000 home equity loan balance, you could combine both into one $200,000 mortgage.
- Pro: This method’s single monthly payment should cost less than the current two loan payments combined, providing relief.
- Con: Extending mortgage debt over a longer term gives the lender more time to charge interest.
Refinancing a home equity loan into a primary mortgage works best for homeowners who can use the new loan to improve their position on both their current loans.
Can You Refinance a Primary Mortgage and Keep Your Home Equity Loan?
Yes, homeowners can keep their current home equity loans while refinancing the home’s primary mortgage. Someone happy with their home equity loan’s rate and term but unhappy with their primary mortgage may want to do this.
The home equity lender must accept a second lien position behind the new primary mortgage. Almost all home equity lenders should be willing to do this.
Benefits of Refinancing a Home Equity Loan
Refinancing a home equity loan resets the loan’s debt into a new loan. It’s a do-over. Most borrowers choose a do-over to save more money the second (or third) time around.
Saving money on a new home equity loan can happen in several different ways:
By Lowering the Loan’s Monthly Payment
Refinancing borrowers have two ways to lower their monthly payments.
- Stretching the same amount of debt across a longer period creates lower monthly payments on the debt.
- Locking in a lower rate can also lower payments.
For example, here are payments on a $50,000 loan at different terms and rates:
| Interest rate* | 10-year term payment | 15-year term payment | 20-year term payment |
| 7% | $581 | $449 | $388 |
| 8% | $607 | $478 | $418 |
| 9% | $633 | $507 | $450 |
A longer term can help achieve the goal of lower monthly payments; however, the longer term will charge more interest over time, as discussed below.
By Paying Less Lifetime Interest
A longer loan term lowers monthly payments on the same amount of debt. But, keeping the debt for a longer term gives the lender more time to charge interest. This chart shows the lifetime interest charged on a $50,000 loan:
| Interest rate* | 10-year total interest due | 15-year total interest due | 20-year total interest due |
| 7% | $17,200 | $30,895 | $43,036 |
| 8% | $21,220 | $36,009 | $50,373 |
| 9% | $26,005 | $41,284 | $57,967 |
As the chart shows, longer loan terms increase the total amount of interest paid, even at the same interest rate. Borrowers can also reduce the total interest paid by paying off a loan early, assuming the loan has no early payoff fee.
Other Benefits
The benefits above change the amount of money owed to the lender. There are other ways to use a home equity refinance to improve your debt situation:
- Combine the loan with other debt: Consolidating a home equity loan with other mortgage debt can lower monthly payments on the debt.
- Generate more cash back: Refinancing a home equity loan creates an opportunity to get more cashback — but only when the home’s value can support more borrowing.
- End a relationship with a lender: Refinancing can end your connection to a lender and begin a relationship with a new lender.
- To eliminate a co-borrower: Refinancing pays off the current home equity loan, ending your financial connection to the co-borrower on the loan. The new loan won’t need a co-borrower at all — if you now have the income and credit score to qualify for the new refi by yourself.
- Transfer the debt: A refinance can change who is responsible for the home equity debt during a divorce or estate distribution.
Refinancing a home equity loan is usually the best way to change details about the debt. Ideally, the new loan will also save money.
Factors to Consider Before Refinancing a Home Equity Loan
The costs of a refinance can be difficult to measure because they come from several different places, but learning how these borrowing costs work will help you get a better deal.
Closing Costs
Closing costs pay for various services required to close the new loan. These costs include fees the lender charges, such as loan origination and processing fees. You may be able to negotiate these fees.
Closing costs also include fees charged by third-party service providers, such as appraisers, attorneys, and title companies. Lenders pass these third-party fees along to you, the borrower.
Collectively, closing costs usually range from 3% to 6% of the loan amount. A $50,000 refinance means $1,500 to $3,000 in closing costs.
Borrowers can roll these costs into their loan amounts, but this method cuts into the size of the loan, and it means paying interest on these fees for years or even decades.
What about No-Closing-Cost Loans?
Some lenders advertise loans with no closing costs or loans on which the lender pays closing costs. To people who can’t come up with the cash and don’t want to borrow the money, a no-closing cost loan sounds like a no-brainer.
In reality, though, the borrower still pays. The lender covers closing costs by charging a higher interest rate, which means the borrower still pays the closing costs gradually through higher monthly payments.
Compare Costs to Savings to Ensure the New Loan is Worthwhile
Closing costs are a good investment only when the new loan’s savings outweigh its costs. It’s the borrower’s job to compare costs to savings.
As you compare costs to savings, keep these questions in mind:
- How long will I need to keep the loan to save money? If closing costs are $3,000 and the loan saves $100 a month, it would take 30 months of making regular payments to balance out the cost. After those 30 months, each additional month with the loan would add to the loan’s savings. Use this breakeven calculator to model scenarios.
- Is there a prepayment penalty for paying off my existing loan? Prepayment penalties on the old loan will cut into the next loan’s potential to save. If your old lender charges this fee, count these in the costs.
- How much interest remains on my current loan? Check your second loan’s statement to see how much of the loan’s lifetime interest you’ve already paid. Depending on the age of the loan, you may have already paid more than half of the interest. Factor that variable into your cost-vs-savings analysis.
The savings on your new loan should be big enough to compensate for all these costs and then some.
Alternatives to Refinancing Your Home Equity Loan
If you’ve compared the costs to the savings and decided not to refinance your home equity loan, you may still have some ways to save:
Paying Extra on Principal
Keeping the same home equity loan and paying extra money on its principal balance can save money without paying closing costs for a new loan. Making regular payments on principal, in addition to making the loan’s monthly payments, pays off the loan sooner.
Ensure your lender knows to apply the extra prepayments to your principal balance.
Paying off a loan sooner reduces the time the lender has to charge interest on the balance.
For example, on a 20-year home equity loan of $50,000 at 8% interest, the regular monthly payment would be about $418. Paying an additional $100 monthly would pay off the loan seven years early, saving almost $20,000 in interest charges.
Other Alternatives to Refinancing a Home Equity Loan
The following products won’t work for everyone, but one might fit your situation:
- A reverse mortgage: Homeowners 62 and older can use reverse mortgages to pay off a home equity loan, assuming the home no longer has a primary mortgage balance (or has a very small primary mortgage balance). Reverse loans require no payments, but their interest accrues anyway, and loan balances must be repaid when the home sells or the homeowner passes away.
- A home equity investment (HEI): HEIs let someone else invest in your home’s equity. You’d get a lump sum of cash, which you could use to pay off the home equity loan. In exchange, the investor would own a percentage of your home equity — a stake that would grow as your home value increases.
- Selling the home: One surefire way to pay off mortgage balances is to sell the home. If you were already considering moving to a different region or downsizing, selling is the obvious solution; otherwise, it’s probably a bad idea.
As you can see, these three methods come with trade-offs — loss of the home, loss of equity, or both. For most homeowners, a home equity loan refinance will perform better. It has a built-in way for the borrower to reclaim control of the home’s equity.
What to Do Next
If you’ve ever bought a car, furniture, or even a pair of shoes, you already know how to shop for a new home equity loan refinance: compare products and prices.
Loans are more abstract than cars, shoes, and furniture, so comparing them might seem more confusing at first. But the potential savings can be enormous.
Get started here.
