Can I refinance my home equity loan? Many homeowners wonder if refinancing an existing home equity loan or line of credit is a good idea. Let’s look at why you might want to refinance your existing loan and how to go about doing it.
Double Dip: Can I Refinance My Home Equity Loan?
Your home is your most valuable investment and many property owners leverage that value with a home loan or line of credit. Changes in the property market and your personal financial situation might have you wondering if it is possible—and smart—to refinance your existing loan.
Why Refinance?
While there’s theoretically no limit to the number of times you can refinance a home equity loan, doing so comes with a range of costs. So let’s look at some situations where refinancing a home equity loan or line of credit might make sense.
Lock in Lower Interest Rates
While interest rates are rising again, you might still be able to lock in a better rate or lower payments than your original home equity loan, especially if you refinance for a similar term, or you have earned significantly more equity in your home since you took out the original loan.
Switch to a Fixed Rate Loan
Home equity lines of credit (HELOCs) offer a convenient way to get cash out of your home, but their adjustable interest rates can work against you, especially if interest rates have risen. Refinancing your HELOC as a fixed-rate home equity loan can lock in a lower repayment rate.
Borrow More
Time waits for no one and if you need to borrow money, a home equity loan is still the cheapest way to do it. If you need a lump sum to help pay college tuition costs or even to make a down payment on a second home, then doubling down with a home equity loan refinance is still the smartest way to go.
Get Better Terms
Do you want to pay less every month or less over the long term? Refinancing your home equity loan for a longer term—say 30 years instead of 15—means you can free up money for other needs today. If you have extra money available now, refinancing for a shorter period means you’ll pay less in interest and financing charges in the long run.
Consolidate Debt
Home loans remain a good place to park higher-interest debt—and not just from HELOCs. Consolidating payments from credit cards or personal loans in a refinanced home equity loan will likely save you money today and in the long term, even if your refinanced rate is higher than your original loan.
Avoid a HELOC Payment Shock
You took on an adjustable-rate HELOC with the best of intentions, but easy terms or unforeseen expenses might have gotten the better of you. Now you face unexpectedly higher charges as your loan resets to a much higher rate. Refinancing your debt now as a home equity loan can help you dodge that bullet.
Avoid Balloon Payments
Similarly, if unexpected debt means you face a balloon payment on a personal loan or HELOC to bring your payments in line with your loan term, then refinancing might offer a cheaper way out in the long term. You might also save money by avoiding a hefty prepayment penalty if you pay off an adjustable-rate loan early!
Steps to Refinance a Home Loan
Refinancing a home loan or home equity line of credit is similar to applying for your original home loan. Typically, you will:
- Fill out an application form and provide documentation: This will include information about your income, expenses, assets, and debts—particularly about your original mortgage and the property against which the debt is secured.
- Pay for a home appraisal and other costs: Your lender will want to know how much your home is worth through a full or expedited appraisal. This will establish how much equity in your home you have.
- Authorize a Credit Check: Your lender will want to check your credit history and score to establish your creditworthiness. The higher your score, the less you’ll pay in interest rate charges. Your lender will also consider the impact of a new loan on your debt-to-income (DTI) ratio. Few lenders will support a DTI above 50%.
- Meet CLTV Ratio Guidelines: Your lender will also want to consider whether your equity in your home supports the combined loan-to-value (CLTV) ratio of your new loan. This is the proportion of the fair market value of your home that your loan reflects and can carry between 60% and 100%, depending on the interest rate you’re offered.
- Pay closing costs and other fees: Closing costs for a refinance are usually between 2% and 3% of your loan balance. You might have to add in additional loan insurance. Other costs include loan application and origination fees, title searches, and legal costs.
Put Your Home’s Equity to Work
Used right, your home’s equity is a great resource for affordable financing. At Belco, we offer our members in central Pennsylvania flexible payment terms and competitive rates to help finance home improvements, debt consolidation, college tuition, and other important needs.
If you’re looking to refinance existing debt into a home equity loan, we offer:
- Terms up to 15 years
- Up to 100% financing
- No application fees or closing costs
- No prepayment penalties
Click below to learn more about our home equity loans.