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Refinance your home equity loan

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How to upgrade your second mortgage

Maybe interest rates have dropped since you took out a second mortgage. Maybe you’ve built up enough equity in your home or boosted your credit score. If you qualify, you could leverage those changes by refinancing your home equity loan.

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How to refinance a home equity loan

The refinancing process is similar to applying for a new mortgage. It differs slightly between lenders and loan types, but in general:

What to watch out for

Refinancing can be risky. These are some of the obstacles you may run into:

  • Closing costs. A home equity loan comes with the same closing costs as a regular mortgage. You may be able to roll them into your new loan or ask for a lender rebate. To save in the long run, factor them into your budget and try paying the closing costs up front. Otherwise, you’ll be paying interest on the closing costs until your loan is paid off.
  • Refinancing fees. Refinancing has its own set of fees, so determine if lower monthly payments will offset those costs.
  • Depreciation of home values. If your home declines in value, you may end up owing more than it’s worth. In that case, you probably can’t refinance your home equity loan.
  • Disparity in interest rates. Cash-out refis tend to have higher interest rates than home equity loans.

How soon can I refinance my home equity loan?

Cash-out refinance

For a cash-out refinance, you must have owned the home for at least six months. You’ll also need to wait until you’ve built up 20% equity in your home — and that’s after you’ve paid off the principal balance on your first mortgage and what you owe on your current home equity loan.

Home equity loan

To refinance to a new home equity loan, you have to meet the minimum loan-to-value (LTV) requirements. These are typically lower for home equity loans than cash-out refis. They vary by lender, but in most cases, you’ll need an LTV ratio between 60% and 90%.

If you’re refinancing for a shorter term, it’s worth doing it before you reach the halfway point in your mortgage. At that stage, you’ll be paying more in principal than interest.

When should I refinance my home equity loan?

If these scenarios apply to you, refinancing might make the most financial sense:

Home equity loan refinance eligibility

For both refinance options, you’ll need to meet the usual mortgage standards. This tells your lender that you’re ready to take on the financial responsibility. To protect themselves, lenders often add overlays, or additional criteria.

Type of loanEligibility criteria
Cash-out refi
  • Own the home for at least six months
  • At least 20% equity in home
  • Credit score of 640 to 680, depending on your LTV, though some lenders have stricter credit requirements
  • Proof of employment and income with pay stubs, tax returns and W2s or 1099s
  • Ability to pay closing costs, including appraisal of home.
New home equity loan
  • At least 15% equity in home
  • Debt-to-income ratio of 43% to 50%
  • Credit score of 620+, though some lenders will only accept 740+
  • Proof of employment and income with pay stubs, tax returns and W2s or 1099s
  • Ability to pay closing costs, including appraisal of home

Bottom line

The goal of refinancing is to give you a better situation, whether it’s a shorter or longer term, a lower interest rate or cash in your pocket. But it doesn’t guarantee you’ll save in the long run. When refinancing a home equity loan, factor in the closing costs and refinancing fees.

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