Refinancing a home equity loan: When and how to do it
Key takeaways
- You can refinance a home equity and, with rates currently in decline, now might be a good time to do it.
- Refinancing a home equity loan can lower monthly payments and lengthen or shorten your loan term.
- Drawbacks to refinancing a home equity loan include prepayment penalties and closing costs.
- Refinancing basically means applying for a new loan. If you don’t qualify, alternatives include personal loans, equity sharing agreements and reverse mortgages.
You’ve probably heard plenty about refinancing your mortgage for better terms. But what about your home equity loan? Since it is essentially a second mortgage, can you refinance it too? The short answer: Yes. You might be able to refinance a home equity loan as you would your primary mortgage.
And now may be a good time to do it. In 2025, home equity loan rates have fallen to their lowest level in more than a year. The even better news? According to Bankrate’s home equity forecast, they seem likely to keep on declining even further this year.
If the current numbers are lower than your loan’s rate — by at least an entire percentage point — it’s worth considering. Here is everything you need to know about when and how to refinance a home equity loan.
How to refinance a home equity loan
Refinancing a home equity loan (HELoan) basically involves replacing your existing loan with a new one.
Steps to refinancing your home equity loan
- Assess your position: It starts with determining whether refinancing benefits you. Look at the current interest rates compared to what you have, calculate potential savings over time, and consider how long you plan to stay in the home. You want it to be long enough to “break even” – that is, have the savings outweigh the costs you’ll pay upfront to refinance.
- Equity check: Calculate your current equity stake. If your home’s value has increased, for instance, from $350,000 to $400,000, and you have paid down your mortgage and previous home equity loan to a total outstanding amount of $200,000, you have $200,000 or a 50 percent equity stake — enough to consider refinancing. (More on minimum equity stakes below.)
- Credit score review: Check your credit score, as it impacts your interest rate offers — or whether you’ll qualify for the refi at all. If you’ve bumped up your credit score significantly since you first got the home equity loan, you may well qualify for a lower rate.
- Shop for lenders: Reach out to several lenders to find the most favorable rates and terms. For example, one lender might offer a 8.5 percent interest rate with no closing costs, while another could offer 8.25 percent with closing costs. You’d want to choose the latter.
- Understand the costs: Know the associated expenses of refinancing. These include application fees or an early payoff penalty on your existing loan. For example, if your lender charges a 2 percent prepayment penalty on your $20,000 home equity loan, you’ll owe $400.
- Decide on type of refi: Based on your goals, decide if another fixed-rate home equity loan, a variable home equity line of credit (HELOC), or a cash-out refinance works best for you. A HELOC might offer a good option if you prefer to access your equity on a rolling basis rather than a lump sum. A cash-out refi would probably offer a lower interest rate, but it does involve replacing your current mortgage.
- Do the application: Apply for the new loan, supplying proof of your income, assets and debts. Depending on the lender’s requirements, a new property appraisal may be needed to assess your home’s current value.
- Review offers: When you get offers, compare the details, being sure to look at the annual percentage rates (APRs) — since they include fees, APRs give a truer sense of the total cost of the loan. If you’re going for a HELOC, be sure you understand how often rates will fluctuate and by how much per year.
- Close the loan: At closing, settle any upfront costs. Use the new loan to pay off your existing home equity loan. Then, start repaying it according to the fresh terms.
In the third quarter of 2024, home equity stakes soared to an average $311,000 per mortgage-holding homeowner, a record high.
How to qualify to refinance a home equity loan
Having a home equity loan doesn’t automatically make you eligible for a refinance. You must qualify. Basically, you’ll need:
- an adequate amount of equity
- a sufficient credit score (in the mid-600s, at least)
- a debt-to-income ratio no more than 43%
- a solid repayment record
The first requirement: Your home serves as adequate collateral to secure the loan. Most lenders require you to have a combined loan-to-value (CLTV) ratio of no more than 85 percent, meaning the sum of all your outstanding home-backed debts (primary mortgage, home equity loan) makes up no more than 85 percent of your home’s total value. In other words, you own at least 15 percent of your home free and clear.
While you’ll have already met this benchmark when you first got your home equity loan, you’ll have to revisit it if you want to refinance — it’s possible your home’s value dropped since you first took out the loan. It’s uncommon, but it can happen if the local residential real estate market has softened significantly, reducing your home’s resale price. It may also happen if your home equity loan was a sizable one, depleting your good chunk of equity out of the home recently, and you haven’t repaid much of it yet.
You also need to meet personal financial and credit requirements. Many lenders require a 620 minimum for refinances in general. Standards for home equity loans tend to be tougher, though, because these second mortgages fall behind primary mortgages in the pecking order of creditor repayment, should you default. Some HE lenders have loosened their standards of late. But a “good” score, preferably above 700, remains the threshold for many institutions. Even among lenders who work with “bad credit” candidates, the minimum score averages around 640.
Keep in mind: Basic loan approval aside, the higher your credit score, the lower the interest rate you’ll be offered on a home equity loan.
You also must have sufficient income to make payments on the loan and a low debt-to-income ratio (DTI) — that is, the monthly bills you pay should generally comprise no more than 43 percent of your monthly gross income.
Finally, you should have a good repayment record with the current home equity loan — especially if you want to refinance with the same lender. It may be hesitant if you’ve missed payments, been late or fallen short. Conversely, if your financials are a little weak but your record is solid, it may cut you some slack, given you’ve been a reliable borrower as far as its loan is concerned.
Reasons to refinance a HELoan
There are several good reasons to refinance your existing home equity loan. They include:
- Reducing your monthly payment. Often, refinancing your home equity loan will result in having to pay less each month. This happens in one of two ways: You score a better (i.e., lower) interest rate on the new loan, or the new loan has a longer term.
- Locking in a lower interest rate. Many people refinance their home equity loans because interest rates have significantly dropped. Locking in a more favorable interest rate can significantly lower monthly payments and, of course, the amount of interest you pay overall.
- Switching from an adjustable to a fixed rate. If your home equity loan currently carries a variable rate, switching to a fixed-rate loan offers more stability. You will have a predictable payment each month instead of one that fluctuates with interest rate trends. Conversely, you may want to ditch a loan with a high fixed rate in favor of a variable rate if interest rates are on a long-term downward course.
- Borrowing additional home renovation funds. Homeowners taking on a major repair (non-functioning furnace, damaged roof ) or remodel often find home equity loans the most affordable way to fund these five-figure projects. If you’ve got a job running above budget, or you’ve augmented it somehow, a refinance could get you help with the same potential tax benefits and lower costs.
- Customizing terms. If you have a five years left on your home equity loan, refinancing gives you the opportunity to change that term. You can either shorten the term to pay it off more aggressively or lengthen it to allow yourself more time to pay off the loan.
Pros and cons of refinancing a home equity loan
Pros
- Better rate: Improving that interest rate is the number one reason to refinance — by a percentage point, at least. If your home equity loan has a fluctuating rate, (they’re rare, but do exist), you can refinance to a fixed-rate vehicle, which could save you money should rates start to climb again.
- Lower monthly payments: All else being equal, if you can get a lower interest rate, you’ll save on your monthly payments and interest overall.
- Shortened or stretched term: Transitioning to a longer term, such as 10 years instead of five, will decrease your monthly payment, though it will also add to the amount of interest you pay overall. Alternatively, you might opt for a shorter loan term, which raises your monthly payments but allows you to pay off the debt faster, saving you on interest and freeing up room in your monthly budget sooner.
- Additional cash: Assuming your equity stake has increased, you can refinance into a bigger loan.
Cons
- Prepayment penalty: Depending on the type of home equity loan and your lender’s policy, you might be subject to a fee if you pay it off early (which is what refinancing does) or before a specific time frame.
- Repayment risks: If you can’t keep up with the payments on the new loan (say you converted to a shorter-term loan with a higher monthly payment), you open yourself up to the possibility of foreclosure.
- At the mercy of the market: If your home declines in value, you could wind up being underwater — that is, owing more between your mortgage and home equity loan than the home is worth. If the real estate market has already softened, you might not be able to refinance at all.
- Longer debt: Refinancing your home equity loan will reset the repayment term. Unless you specifically choose a shorter loan, it will extend the debt. If you sell the home, it could mean a bigger bite into your proceeds, as you’ll have to pay off the home equity loan immediately.
Can you refinance a home equity loan and your mortgage at the same time?
Yes, it is possible to refinance both a home equity loan and your primary mortgage simultaneously. A typical way to do it is through a cash-out refinance, which entails taking out a larger mortgage than your current one, getting the difference in ready money. In this case, you can use the surplus funds to pay off your home equity loan.
Advantages of refinancing both loans simultaneously
- Debt consolidation: This option allows you to combine your primary mortgage and home equity loan into a single payment, simplifying your financial management and potentially offering a lower overall interest rate than standard home equity loan (refis tend to run a percentage point or two cheaper).
- Access to cash: The “cash-out” part of a cash-out refinance means you end up with additional funds. If there’s anything left after paying off the home equity loan, you could use the cash for various expenses like home improvements, credit card bills or tuition.
Drawbacks to refinancing both loans simultaneously
- Potential for higher interest rate: Cash-out refinances often attract higher interest rates than standard rate-and-term refinances, which could lead to increased costs over the life of the mortgage. Also, the prevailing interest rate may be higher than that on your current mortgage.
- Increased loan amount and duration: You’ll essentially be taking out a larger loan, and extending your repayment period. This might lead to higher total interest payments, especially if you don’t plan on accelerating your payments to compensate for the reset amortization schedule.
Keep in mind: A mortgage refinance is essentially getting a new mortgage — with all the costs and time-consuming procedures that implies. You might not want to let yourself in for the extra complications, if all you really need is to update your HELoan. It’s also not advisable if it means giving up a low interest rate on your present mortgage.
What if you don’t qualify for a home equity loan refinance?
If you find yourself unable to refinance your home equity loan, consider exploring these alternative paths to paying it off. Basically, these options involve exchanging one obligation for another.
- Home equity sharing agreements: These agreements, which give you a lump sum, often have more lenient criteria, potentially suitable for those with lower credit scores or other weak financials. Technically, the money you receive is an investment in your home, not a loan: Instead of receiving regular monthly payments, the investing company takes a share of your home’s future value when you sell it or at the end of a specified period. However, if your home appreciates significantly, this could end up being more costly than traditional loan interest payments.
- Reverse mortgages: Seniors (those aged 62 and up) can tap into their home equity by taking out these mortgages without monthly payments; instead, the loan is repaid when the home is sold or the borrower permanently vacates it. However, note that interest accrues on a mortgage balance over time, which can substantially increase the amount owed in the long run.
- Personal loans: Unsecured personal loans can provide fast cash for emergencies or other needs. These loans generally carry higher interest rates than those secured by your home and shorter terms; they may have additional fees, as well.
For example, your lender may be willing to put your payments in forbearance for a short period. This means you won’t have to make payments for a few months. That can be a big help if you’re only facing short-term financial issues. But be sure to ask how they’ll capture those deferred payments once forbearance ends.
You can also request a loan modification. Like refinancing, this can adjust the details of your loan, such as its interest rate, term, or monthly payment, making it more affordable. However, it does not require applying for a new loan.
Is home equity loan refinancing right for me?
Refinancing a home equity loan can be a smart move for those chafing at the high interest rate on their current loan — especially if it’s a couple of percentage points above prevailing rates. If, in addition, your financials have improved substantially since your first loan, you could definitely for a better deal.
It can also be a good idea if your payments are beginning to be too much. Refinancing into a longer-term loan will reduce their size — though it will mean paying more interest overall. (As with a regular mortgage refinance, you have to apply for a refinance of your home equity loan, either with the current lender or another one. Be prepared to provide credit and financial information to the lender, along with a list of assets and liabilities.
In many ways, it’s similar to the first time around — though often, refinancing a HELoan is easier, given that you’ll probably be applying for a smaller sum and likely have a good track record repaying the first debt. Still, you’ll want your financial profile to look as strong as possible.
The best reason to refinance a home equity loan is if interest rates have dropped since you borrowed the first time. Just be sure to consider your timeline for staying in the home, be aware of any change in your home value, and take into account any fees you might incur, like closing costs.
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