Borrowing from your home equity is a good way to pay for major expenses or home improvement projects. But if rates drop later on, can you refinance a home equity loan?
In many cases, the answer is “yes.” If the home equity loan rates available in the market today are lower than the original rate on your home equity loan or HELOC, it’s worth exploring whether refinancing with a new home equity loan would save you money or help you reach your financial goals.
Reasons to refinance a home equity loan
A home equity loan refinance is typically a good idea if you’ve built up substantial equity in your home or if you want to take advantage of low interest rates. Here’s a list of common reasons to refinance a home equity loan:
- Get a lower interest rate.
- Convert from an adjustable-rate to a fixed-rate installment loan.
- Obtain shorter-term loan to build new equity more quickly.
- Avoid a balloon payment.
- Extract more cash from equity.
Home equity loan refinancing considerations
Before committing to a refinance of your home equity loan or HELOC, it’s important to consider the drawbacks of doing so. Refinancing isn’t without its risks, so make sure to take into account any fees or obstacles you may encounter.
Costs of refinancing a home equity loan
Deciding to refinance a home equity loan does not necessarily guarantee cash savings. Some lenders may require that you pay closing costs, prepayment fees or other fees, so make sure to weigh whether lower monthly payments offset that cost. Consider, too, the extra interest you’ll pay by restarting a new loan term.
Risks of refinancing a home equity loan
Refinancing a home equity loan also involves risk. For one, if you don’t make the payments on the new loan, you could lose your home. If your home declines in value, you may owe more than it’s worth, and you may not be able to sell it or refinance your first mortgage or home equity loan.
You should also take into consideration whether or not your financial situation has changed since you first took out your loan. When you apply to refinance a home equity loan, lenders will consider:
- The value of your home.
- The percentage of your equity that you want to borrow.
- Your credit score.
- Your income and employment situation.
- Other factors of your creditworthiness and property.
If your creditworthiness has dropped since you first took out your loan, or if you owe more than your home is currently worth, you may not be approved for a refinance.
The bottom line
In general, it’s best to refinance a home equity loan when you have a significant amount of home equity or if rates have dropped since you took out the original loan. But while refinancing a loan or line of credit is a good way to take advantage of lower interest rates or protect against balloon payments, make sure you take into account any fees you may incur by refinancing.