Can You Refinance a Home Equity Loan?
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There are several reasons why you might choose a cash-out refinance over a home equity loan. Two of the most common are cash-out refinancing and home equity loans. Amanda Jackson has expertise in personal finance, investing, and social services. She is a library professional, transcriptionist, editor, and fact-checker.
Our editorial team does not receive direct compensation from our advertisers. Another alternative to paying closing costs is to pay a higher interest rate. However, as you’re probably trying to get a lower rate by refinancing, this isn’t the most promising strategy. Will you be able to afford the monthly payments if you lose your job, take a pay cut, or have to work less because of a serious illness or disability? You could lose your home to foreclosure if you fall too far behind on your payments.
Cash-Out Refinance vs. Home Equity Loan: What's the Difference?
You can replace your existing home equity loan with a new one that’s the same size—or larger, if you have enough equity. Your home secures the loan, so your home is at risk if you fall behind on your loan repayments. In this article, we'll look at these two types of mortgage refinancing. A home equity loan gives you cash in exchange for the equity you've built up in your property as a separate loan.
If you’re planning on tapping into your home’s equity, it’s key to have a strategy for how you’ll use and pay back the money you borrow. So, you want to make sure you have room in your budget in case you face job or income loss. Home equity loans and HELOCs allow you to access your home’s equity without changing your primary mortgage’s interest rate.
Should I do a cash-out refinance to pay off my home equity loan?
The primary advantage of a cash-out refinance is that the borrower can realize some of their property's value in cash. Well, there are two main reasons—lowering the overall cost of your mortgage or releasing some equity that would otherwise be tied up in your house. Home equity loans, by contrast, use your equity as collateral for an entirely new loan.
You’ll need to provide documents such as pay stubs, W-2 forms, bank statements, and income tax returns to prove that you can repay the loan for which you’re applying. To qualify for a home equity loan refinance, you need enough equity to meet the lender’s combined loan-to-value ratio requirements, good credit, and enough income to repay the loan. A 125% loan, often used in mortgage refinancing, allows homeowners to borrow more money than the equity they have in their property. Even if you are happy with your mortgage repayments and term, it can be worth looking into home equity loans. Maybe you already have a low interest rate, but you’re looking for some extra cash to pay for a new roof, add a deck to your home, or pay for your child's college education.
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If you ever find yourself struggling to pay your mortgage, talk to your lender immediately. They will often work with you to avoid foreclosure, if you seek help early on. Both a cash-out refinance and a home equity loan allow you to take out some of your home’s equity as a lump-sum payment. With the cash-out refinance, this amount is added to a larger, new mortgage.
In some cases, you may not be able to refinance a home equity loan. These are the same circumstances that could prevent you from refinancing your first mortgage. It may take several weeks for your lender to complete all the steps to refinance your home equity loan.
During the HELOC draw period, which is usually 10 years, you’ll typically have the option to make interest-only payments. It’s a question that many homeowners are no doubt asking themselves right now, given how popular home equity loans and home equity lines of credit have proven to be for many families. Compare rates and payments for a variety of home equity options.
In a typical cash-out refinance, the homeowner takes out a new mortgage for more money than they owe on their current one. After they've paid off the old mortgage, the extra cash is theirs to spend. They will still have to pay it back, of course, and it will be racking up interest in the meantime. You can use a personal loan for almost any purpose, so if you want to use the money to pay off a home equity loan, you can. This option is not always the best choice but could make sense if you have a high home equity loan rate that you can replace with a low-interest personal loan, for example. You’d want to apply for both types of loans with several lenders and see which was the better deal.
One downside is that HELOCs usually have a variable interest rate, so when interest rates are rising, your payments can increase significantly. With a home equity loan, you borrow a set amount of money and pay it back over time, typically at a fixed interest rate. That fixed interest rate means your monthly payment will be constant over the term of your loan.
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