Can I Refinance a Home Equity Loan?

Refinancing a home equity loan can help you land better terms, but whether it’s actually a good idea depends on your current rates, available equity, eligibility, and costs.

Understanding Home Equity Loan Refinancing Options

Home equity loan refinancing means replacing your current home equity loan with a new loan. Refinancing is often used to secure a better rate, lower monthly payments, choose a different term, or combine debts.

You generally have two paths:

• Refinance only the home equity loan. Your first mortgage stays unchanged, and you take a new second-lien loan with updated terms.
• Consolidate everything with a cash-out refinance. You replace your first mortgage (and any second lien) with one new mortgage and take cash from your equity if needed.

Each approach has different steps, payment structures, and eligibility rules.

Eligibility Requirements for Refinancing a Home Equity Loan

Combined loan-to-value (CLTV) is the sum of all your home loans divided by your home’s appraised value, expressed as a percentage. Lenders use CLTV alongside credit and income to gauge risk.

Typical requirements to refinance include:

• Credit score: You’ll generally need a credit score of at least 620 to refinance your home equity loan. Stronger pricing often begins around 680 or higher.
• Equity: Most lenders want at least 15% to 20% equity remaining after the refinance. Cash-out refinances generally require leaving roughly 20% equity in the home.
• Debt-to-income (DTI): DTI is commonly capped near 43%–50%, with stable, documented income.
• Appraisal: Most refinances require a new appraisal. That commonly costs between $500 and $700, though some lenders may waive or use alternative valuation.
• VA cash-out exception: Certain VA cash-out refinances can allow up to 100% LTV, but eligibility is limited.

Financial Considerations When Refinancing

Rates for home equity loan refinancing and cash-out refinances can differ, so be sure to compare the long-term cost of both routes when weighing your options.

Depending on the lender and your personal situation, a refinance can come with various fees, including:

• Closing costs: Typically 2% to 5% of the loan amount, plus title and recording fees where they apply.
• Appraisal and third-party fees: Often $300 to $500 for the appraisal. Other vendor fees may apply.
• Prepayment penalties: Some loans carry early payoff fees

The length of the loan also matters. Extending into a new 15‑ or 30‑year term may lower the monthly bill but increase total interest over the life of the loan. How you use the money matters for taxes: Interest on home equity debt is typically deductible only when used for qualifying home improvements.

Here’s an illustrative cost snapshot of how the costs might break down when refinancing a home equity loan. Your situation will likely differ from this, so consult with an expert loan advisor to get an idea of how your situation breaks down.

Rates, fees, and payments vary. Always compare lifetime interest, not just the monthly change.

Home Equity Loan Refinancing vs. Cash-out Refi

Cash-out refinancing replaces your existing home loans with a larger new mortgage, letting you convert available equity to cash and simplify to one monthly payment.

Refinancing only the second lien keeps your first mortgage intact and updates the home equity loan. This route typically requires the first-lien lender to confirm priority via a subordination agreement.

In practice, second-lien refinancing is often optimal if you’re protecting a below-market first mortgage. Cash-out can shine when prevailing first-mortgage rates are at or below your current rate, or you want to consolidate debt.

Application process and timeline for refinancing

Refinances

1. Review your finances and confirm basic eligibility (credit, CLTV, DTI).
2. Gather documentation: income, assets, debts, property details, and homeowners insurance.
3. Apply for the refinance and authorize credit/verification.
4. Complete appraisal and underwriting; respond quickly to any conditions.
5. Receive final approval, review the Closing Disclosure, and sign at closing.

Most refinances take about 30 to 45 days from application to funding, depending on your scenario and how quickly documents are provided.

Risks and Factors to Evaluate Before Refinancing

Refinancing is a big decision, and your monthly payment isn’t the only thing you should look at. Here are a few risks and factors to weigh when you’re refinancing:

• Replacing a low first mortgage rate: A cash-out refinance could raise your rate on the entire balance. Al
• Paying more interest over time: Extending into a new 15‑ or 30‑year term can increase lifetime interest even if the payment drops.
• Closing and origination costs: Upfront fees can offset monthly savings if you’ll move or pay off soon.
• Home value shifts: Regional equity variation and pockets of declining prices can tighten eligibility and increase risk.
• Tax treatment: Interest on home equity proceeds typically remains deductible only when used for qualifying home improvements.

How to Decide on Refinancing a Home Equity Loan

If you’re locked into a great first mortgage rate, you might want to focus on refinancing only the home equity loan.

If today’s first mortgage rates are competitive with your current rate (or you want a single payment), you might consider a cash-out-refinance.

Here’s a more in-depth look into what you should consider when thinking about a home equity loan refinance:

1. Compare your current first mortgage rate to today’s rates. If it’s materially lower, guard it.
2. Model the total cost: interest over time, closing fees, and tax effects, both for keeping two loans and consolidating into one.
3. Check eligibility: ensure you’ll retain 15%–20% equity post-closing (or meet specific program rules).
4. Shop multiple offers: weigh rate, term, points, and lender fees, not just the APR.
5. Use a refinance calculator to estimate breakeven and lifetime savings, then choose the path that meets your goals (payment stability, speed to payoff, or cash access).

The Bottom Line

It’s possible to refinance a home equity loan, but whether that’s a good idea depends on your personal situation. Refinancing could land you a lower rate or more favorable terms, but it could also mean you’ll end up paying more interest over the life of the loan.

A cash-out refinance is another option. That replaces both your primary mortgage and your home equity loan with a new, larger loan. It can be useful for taking advantage of lower rates, or if you want to consolidate into a single monthly payment, but can also lead to more interest paid over time.

Frequently asked questions

Can you refinance a home equity loan?

Yes. You can replace it with a new home equity loan, switch lenders, or consolidate it with your first mortgage using a cash-out refinance.

When does refinancing make sense?

It can make sense if today’s rates are lower than your current rate, you want to reduce payment volatility, access more equity, or consolidate debt.

What are the typical eligibility requirements?

Most lenders look for a 620+ credit score, at least 15%–20% equity remaining after the refinance, and a manageable debt-to-income ratio.

How much do closing costs affect refinancing decisions?

Closing costs of about 2% to 5% of the loan amount can significantly impact savings; compare them to your monthly benefit and how long you’ll keep the loan.

How long does the refinancing process usually take?

Expect roughly 30 to 45 days from application to closing, depending on documentation and lender timelines.