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MoneyWatch: Managing Your Money

Can you refinance a home equity loan?

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By
Angelica Leicht
Senior Editor, Managing Your Money
Angelica Leicht is the senior editor for the Managing Your Money section for CBSNews.com, where she writes and edits articles on a range of personal finance topics. Angelica previously held editing roles at The Simple Dollar, Interest, HousingWire and other financial publications.
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Angelica Leicht

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House resting on calculator concept for mortgage calculator, home finances or saving for a house
It's typically possible to refinance your home equity loan, but it may not always be worth it. Getty Images

Homeownership often comes with the need for additional financial resources, whether you need the money to fix a leaky roof, repair a broken appliance or update outdated fixtures or layouts. After all, when you own a home, it's smart to take care of issues early and keep the property in tip-top shape. Otherwise, the small issues could compound and cost you a lot more than you bargained for.

Not all homeowners have a ton of spare cash on hand to cover these types of costs, though. Instead, many homeowners opt to turn to home equity loans to tap into the value they've built in their properties. These loans allow homeowners to borrow against the equity they've built up in their homes, using the property as collateral. Home equity loans often have fixed interest rates and predictable monthly payments, making them a popular choice for financing home improvements, debt consolidation or major expenses.

However, just as with a primary mortgage, the terms of a home equity loan are not set in stone. In turn, some homeowners may find themselves wondering whether they can refinance their home equity loans to secure better terms, lower interest rates or simply to adapt to changing financial circumstances. So can you refinance a home equity loan if you need or want to? 

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Can you refinance a home equity loan?

The short answer is yes, homeowners typically have the option to refinance their home equity loans, just as they can with their primary mortgages. When you refinance a home equity loan, you're essentially taking out a new loan to pay off the existing one, typically with the aim of securing better terms. 

There are several reasons why homeowners may choose to refinance their home equity loans, including:

Interest rate reduction

One of the primary reasons to refinance is to secure a lower interest rate on your loan. If market conditions have changed since the original home equity loan was taken out, homeowners may be able to lock in a more favorable rate, potentially saving thousands of dollars over the life of the loan.

For example, the average rate on home equity loans is currently 8.95%. But let's say rates drop in a year, declining to 6.50% instead. In this case, you may want to consider refinancing your home equity loan, as a rate drop that steep could result in serious savings on interest charges.

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Changing loan terms

Refinancing also allows homeowners to modify the terms of their home equity loan. This might involve extending the loan term to reduce monthly payments or shortening the term to pay off the loan more quickly. That can be a big benefit if you need to lower your payment by extending the loan term or want to cut down on interest charges by cutting down on the time it takes to pay off your home equity loan.

Access to additional funds

Homeowners may choose to refinance to access additional funds. For example, if the value of the home has increased or if the homeowner's creditworthiness has improved, they may be eligible for a larger loan amount — which can be useful when you need to borrow money at a low interest rate compared to credit cards or other types of loans.

What to consider before refinancing a home equity loan

While refinancing a home equity loan can offer numerous benefits, it's essential to carefully consider the following factors:

  • Closing costs: Refinancing typically involves closing costs, similar to those incurred when initially taking out a home equity loan. These costs can include application fees, appraisal fees, and other expenses. Homeowners should weigh these costs against potential savings to determine if refinancing makes financial sense.
  • Creditworthiness: Lenders will assess the homeowner's creditworthiness when considering a refinance. A strong credit score can lead to better interest rates and more favorable loan terms.
  • Market conditions: Monitoring current market conditions is crucial. Interest rates may fluctuate, impacting the potential benefits of refinancing. It's advisable to refinance when rates are lower than the original loan.

The bottom line

Refinancing a home equity loan can be a strategic financial move for homeowners looking to optimize their borrowing terms. By carefully evaluating the potential benefits, considering associated costs and staying informed about market conditions, homeowners can make informed decisions to enhance their financial well-being. Before embarking on the refinancing journey, though, it makes sense to shop around for competitive loan offers to help ensure that you secure the most favorable terms for your unique circumstances.

Edited by Matt Richardson

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