Should You Refinance A Home Equity Loan?

Table of Content

• Reasons to Refinance a Home Equity Loan
• Home Equity Loan Alternatives To Consider
• Why should you consider refinancing?
• Is it worth paying the closing costs to consolidate my first mortgage and my home equity loan?
• Does It Cost Anything To Refinance A Home Equity Loan
• Your Equity Amount Will Help You Pick The Best Option

Refinancing a home equity loan usually comes down to whether or not doing so improves your financial health. And we know that even when using a mortgage calculator, the math can be pretty complicated. So ask a home loan specialist you can trust for helplike our friends at Churchill Mortgage.

HELOCs have variable interest rates, but some home equity lenders allow you to lock in a rate on some or all of your balance for a fee. Instead of refinancing, you can simply take out a second mortgage against the equity that youâve built up in your home. While youâll avoid some of the fees of refinancing, a second mortgage is almost always the most expensive way to access home equity, as it comes with higher mortgage rates than your primary mortgage. Itâs generally used as a last resort, especially by people with bad credit. Right now, with homeowners hunkering down and housing demand decreasing, home interest rates are incredibly low.

Reasons to Refinance a Home Equity Loan

These often include W-2 statements, proof of employment history, your Social Security number, and more. You may also need information like your most recent mortgage statement, proof of your home’s valuation, any liens against your home, and more. Because home equity loans are essentially second mortgages, they work much like your first. You’ll choose a lender, fill out an application, send over your documentation, await approval, and close on the loan. You’ll get a lump-sum payment for your loan amount, which you’ll pay back month by month as you do with your initial mortgage. While you might pay a higher interest rate, some home equity loan lenders may waive all or part of the closing costs.

An early closure fee of 1% of the original line amount, maximum $500, will apply if the line is paid off and closed within the first 30 months. An annual fee of up to $90 may apply after the first year and is waived with an existing U.S. A 125% loan, often used in mortgage refinancing, allows homeowners to borrow more money than the equity they have in their property.

Home Equity Loan Alternatives To Consider

Obtain a shorter-term loan to build new equity more quickly.Avoid a balloon payment.Extract more cash from your homes equity to finance a home improvement project. As mentioned earlier, a HELOC works similarly to a home equity loan in that you borrow cash against the value in your home. But a HELOC acts as a line of credit thats available as you need it, and you only pay back the money you take out. Whether you go the equity loan or cash-out refinancing route, you’ll end up with a higher equity home-sweet-home as your mortgage steadily decreases. Any additional loan taken out on a property following or beyond a borrower’s first mortgage loan and is secured with the same collateral.

Increased income – If your income has greatly increased since you purchased your home and you can afford higher monthly payments, a refinance can lower your loan term. This will allow you to pay off your home more quickly and reduce the amount of interest paid to the bank over the life of the loan. However, many refinance deals have unfavorable loan terms or come with a high-interest rate. In particular, some refinance deals will require homeowners to take out a new mortgage and pay monthly payments â often at the risk of foreclosure. Unlike traditional mortgage loans, this does not have a set monthly payment with a term attached to it. It is more like a credit card than a traditional mortgage because it is revolving debt where you will need to make a minimum monthly payment.

Why should you consider refinancing?

Forbes Advisor adheres to strict editorial integrity standards. To the best of our knowledge, all content is accurate as of the date posted, though offers contained herein may no longer be available. The opinions expressed are the author’s alone and have not been provided, approved, or otherwise endorsed by our partners. In some cases, you may not be able to refinance a home equity loan. These are the same circumstances that could prevent you from refinancing your first mortgage.

Here are some of the first things you should do when youâre ready to apply for a home equity loan. Then, minus the $200,000 still owed on the first mortgage, this means the client is eligible for a loan of $120,000 against their property. This principal is referred to as the combined loan-to-value ratio. This is usually years long and involves paying back both the principal and interest each month. Money Under 30 compares the best tools for tracking your credit report and score. There are several potential benefits to refinancing a home equity loan.

If you’ve got good credit, lenders may be willing to offer you a lower interest rate than what you’re currently paying. Think of it as a loan consolidation combined with a rate-and-term refinance. The equity that you built up in your home over the years, whether through principal repayment or price appreciation, remains yours even if you refinance the home. Though your equity position over time will vary with home prices in your market along with the loan balance on your mortgage or mortgages, refinancing in itself won't affect your equity.

Cash-out refinancing can be ideal if you intend to stay in your home for at least a year and your interest rate will drop, resulting in lower monthly payments. Ideally, you’ll get both low rates and fees, but there’s usually a trade-off. At the very least, shop for at least three home equity loans. A second mortgage is normally used to borrow against a home’s appreciated value or borrow principal that the homeowner previously paid off on the first mortgage. Keep in mind that the refinance is essentially another loan, or mortgage, that has a new timeline, which means it might take you longer to pay off.

Another benefit to home equity loans is that you can pay off the loan early and refinance the loan at a lower rate. A refinancing is merely taking out a new loan, presumably at a lower interest rate than the existing loan, and using the funds to pay off the higher-rate loan. By refinancing at a lower rate, you can save on the monthly payment and pay off the loan sooner. However, borrowers would need to go through the credit approval process again, and there may be fees for booking the new loan. If you need extra money intermittently, a variable-rate home equity line of credit might be your best choice. Once the lender approves you for a maximum line amount, you can access the available funds as you need them.

These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.

You can take out an entirely new mortgage for your home, borrowing more than your current home loan balance based on your home equity. It’s smart to track home equity loan rates to see when it makes sense for a refinance. If you can’t refinance your home equity loan and the payments have become unaffordable, contact your loan servicer as soon as possible to ask about a loan modification. If you’ve experienced a financial hardship, your servicer might work with you to change your loan terms so that the payments fit your budget. A cash-out refinance could be a good way to refinance a home equity loan if you also want to refinance your first mortgage and borrow more money. In general, cash-out refis have better interest rates than a home equity loan, though not as good as the rates for a rate-and-term refinance.

This led the financial institution to file for bankruptcy, causing the global economic crisis. Your lender may let you finance your closing costs, which eases the sting of this added expense in the short run. However, by rolling closing costs into your loan, you’ll be paying interest on them for years to come.

Cash-out refinancing is ideal for borrowers requiring a substantial sum of money for a specific purpose, such as a major home improvement. Amy Fontinelle is a leading personal finance expert with nearly 15 years of experience. You can connect with Amy on Twitter (@AmyFontinelle) or learn more at her website, AmyFontinelle.com. Whatever your reason, here are your options and the main steps you need to take in each case.