Refinancing a Home Equity Loan: A Complete Guide

In the current economy, refinancing a home equity loan is becoming more and more common. And for anyone who can score low-interest rates, now is a great time to do it and save money on monthly payments. But there are still a few things you need to know about home equity loan refinancing before you actually decide to do so.   

In case you got a bad deal in the past and your home equity loan has a higher interest rate than your first mortgage, refinancing it may save you a lot of money. By doing so, you’ll receive a new loan with a lower interest rate and may be able to reduce or eliminate private mortgage insurance (PMI) payments. You may also be able to shorten the term of your loan, which could save you money on interest over the life of the loan.  

Before you refinance a home equity loan, make sure you understand the pros and cons of the whole process, as well as the fees associated with it.   

What Is a Home Equity Loan?

Many people wonder if they can refinance a home equity loan without actually knowing what that means. So, let’s first cover the basics.  

A home equity loan is a type of loan that allows you to borrow against the value of your home. 

Home equity loans are typically used to finance home improvements or repairs, but they can also be used for other purposes, such as consolidating debt or paying for major expenses.  

If you’re thinking about this, you are in the right place to learn how to refinance a home equity loan and what are some perks of doing so.  

Can You Refinance a Home Equity Loan?

The answer to this question is yes, you can refinance a home equity loan. In fact, many homeowners do so in order to take advantage of the changed terms of their loans.  

There are a few things to keep in mind before you try to refinance your home equity loan. First, you’ll need to contact your lender and see if they allow this as not all lenders do.  

Once you know that your lender does allow refinancing, you’ll need to gather some information about your current loan. You’ll need the balance of your loan, the interest rate, and the term length. With this information in hand, you can start shopping around for a new loan.  

When you find a new loan that you like, you’ll need to apply for it and be approved. Once approved, you’ll sign a new loan agreement and begin making payments on your new loan. It’s important to keep up with these payments, as failure to do so could lead to foreclosure on your home.  

What Does It Mean to Refinance a Home Equity Loan?

When you refinance a home equity loan, you are essentially taking out a new loan to pay off your existing home equity loan. There are a few different reasons why you might want to do this. Perhaps you have an opportunity to get a lower interest rate on the new loan, or maybe you want to change the terms of the loan such as the length of the repayment period.  

Whatever your reason for refinancing, it’s important to understand how the process works. When you refinance a home equity loan, you’ll need to apply for a new loan and go through the approval process all over again. This means that your credit score will be pulled and that you’ll need to provide documentation of your income and assets.  

Once you’re approved for the new loan, you’ll use the funds to pay off your existing home equity loan. You’ll then be responsible for making payments on the new loan according to the terms that have been agreed upon. 

How to Refinance a Home Equity Loan

A home equity loan is a second mortgage on your home and they typically have lower interest rates than first mortgages, making them a good option if you’re looking to save money.  

As we already said, to refinance your home equity loan, you’ll need to apply for a new loan and go through the approval process again.  

Don’t overlook that in order to refinance your home equity loan, most lenders will require an appraisal of your home’s current value. This is to ensure that they’re not lending you more money than your home is worth.  

Pros and Cons of Refinancing a Home Equity Loan

When it comes to a home equity refinance loan, there are both pros and cons to consider. On the plus side, it can help you lower your monthly payments or interest rate, which can save you money in the long run. It can also give you some much-needed breathing room if you’re struggling to make ends meet each month.   

However, there are also some potential drawbacks to it that you should be aware of before making any decisions. For one thing, refinancing typically involves closing costs which can add up to several thousand dollars so it’s important to factor that into your decision-making process.   

Additionally, if you’re already struggling to make your monthly payments, refinancing may not be the best option for you as it could put you at risk of defaulting on your loan and losing your home as a result.  

Pros  

• You may be able to get a lower interest rate, which can save you money over the life of the loan.  
• If you have a variable-rate loan, you may be able to lock in a fixed rate, which can provide peace of mind and budgeting certainty.   
• You will be able to extend the term of the loan, which can lower your monthly payments.  
• You can use this opportunity to consolidate other debt or make home improvements.  

Cons  

• While refinancing may help you lower your monthly payments it also means taking on new debt. This new debt can be expensive and may put your home at risk if you can’t make the payments.  
• Refinancing usually means extending the term of your loan, which could mean paying more in interest over the life of the loan.   
• If you have good credit, you may be able to get a lower rate by simply shopping around for a new home equity loan instead of refinancing.  

Is Refinancing a Home Equity Loan a Good Idea?

Certainly, there are a lot of questions that rise here. First, is refinancing a good idea for your current financial situation? Second, what are the terms of your new loan?  

While the answers to these questions greatly depend on your personal situation, in general, refinancing can offer you many benefits. Some of them you maybe didn’t know about when you took out a loan for the first time. 

When Does Refinancing a Home Equity Loan Make Sense?

Refinancing a home equity loan can make sense for several reasons. Maybe your credit score has improved since you took out the loan, and you can now qualify for a lower interest rate. Or maybe you need to extend the repayment period to make the monthly payments more affordable.

Refinancing can also be a good idea if you want to tap into your home equity to make some home improvements or pay off other debts. By doing this, you can get a larger loan amount and take cash out of your equity.

Bottom Line

If you’re considering refinancing your home equity loan, there are a few things to keep in mind. First, shop around and compare rates from different lenders. Second, make sure you understand the terms of the new loan and what fees you’ll be responsible for.   

And finally, be sure to calculate the total cost of refinancing, including any closing costs, so you can be sure it’s the right decision for you. In case you need any additional help in this whole process we suggest you hire a financial advisor.