Home loan refinancing: what you need to know
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Home equity loans allow you to turn the equity in your home into cash, and they are a popular way to cover the costs of home renovations, medical bills, tuition, and other major expenses.
But interest rates on home equity products are always changing, and there might come a time when rates fall below your current rate. If this happens, it might be a good idea to refinance your home equity loan to take advantage of this lower rate.
Here’s when you might want to refinance your home equity loan and the pros and cons of doing so:
Can You Refinance a Home Equity Loan?
Yes, you can refinance a home equity loan, as you can any other type of mortgage.
To do this, you would apply for a new home equity loan (from your current lender or another – whichever is better) and then use the new loan to pay off the old one.
Ideally, the new loan would come with a lower interest rate, lower monthly payment, or access to more cash.
Conditions for refinancing a mortgage
You will need to meet certain financial requirements in order to refinance. Although the exact standards vary from lender to lender, you will generally need the following:
- Debt-to-income ratio less than 43%
- At least a credit score of 680
- A variety of documents, including your photo ID, and recent W-2s, tax returns, and bank account statements.
Finally, your home’s loan-to-value ratio will also play a role, especially if you’re looking to access more cash. For this reason, your lender may order an appraisal to assess the value of your property.
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Reasons to refinance a home loan
While most homeowners refinance their home equity loans to save on interest or lower their monthly payments, there are other reasons you might want to do this as well.
Here are a few reasons why you might consider refinancing:
- Reduce your monthly payment: Refinancing a loan with a lower interest rate can lower your monthly payment. You can also go for a longer-term loan, which would spread your payments even further and reduce your balance even more.
- Switching from a variable rate loan to a fixed rate loan: If you have an adjustable rate home equity loan, your interest rate could very well increase soon, resulting in your monthly payment. Refinancing into a fixed rate loan can help you avoid this.
- Modify the duration of your loan: You can also use refinancing to change the term – or the length – of your loan. Switching to a longer term loan (from a five-year term to a 10-year term, for example) would reduce your monthly payments and allow you to pay off the loan over a longer period. Refinancing into a shorter term loan (10 to 5 years) would mean a higher payment but a shorter repayment period.
- Get more money out of your home: If you need more money for renovations, repairs, or any other cost, refinancing a higher balance loan can help you do that. Keep in mind that this will also increase your payments.
If you’re hoping to save on interest or lower your payments by refinancing, be sure to shop around. Credible can help you compare the rates of our partner lenders. Our process is safe and simple – you can see pre-qualified rates in as little as three minutes, and you don’t even have to leave our platform.
Disadvantages of refinancing a home loan
Refinancing your home loan is not without fault. On the one hand, you’re putting your home at risk – and it’s still a risk you shouldn’t take lightly.
If you are considering home equity refinancing, consider these risks first:
- You are using your house as collateral. Home equity loans use your home as collateral, so make sure you’re completely comfortable with your new payment. Failure to pay your loan could mean the total loss of your home.
- You could end up owing more than your home is worth. If the value of the home goes down in your area, you may owe more on both of your mortgages than the home is actually worth. This is called being “upside down” on your mortgage and could cause a problem if you have to sell or fall through hard times.
- Refinancing will not be free. Refinancing comes with various fees and closing costs, so you will need cash in the bank to move forward. You should also ask your current lender what prepayment charges might be on your bill as well.
Learn more: HELOC vs Home Equity Loan: How to Decide
Should You Refinance Your Home Loan?
Obviously, refinancing a home equity loan has both advantages and disadvantages. While it can help you lower your payment or take more money out of your home, using your home as collateral does come with risk.
In the end, the right choice depends on many factors. If you are looking to access more cash, you will need to determine how much you can withdraw, which is your home equity.
Keep in mind, however, that many lenders will not allow you to leverage the full value of your home, so it could be even less than that.
You’ll also need to figure out what you could realistically afford – both monthly and in advance, and have a solid grasp of your refinancing goals. This will allow you to assess whether refinancing is a good opportunity or not.
Finally, understand your lender’s requirements for the loan, as well as interest rate you may be eligible, is also critical. Credible can help. Simply enter your information in the table to see what rates you pre-qualify for.