Can You Refinance a Home Equity Loan?

If you took out a home equity loan a few years ago, your financial situation or the broader rate environment may have changed since then. Refinancing a home equity loan can help you adjust your interest rate, loan term, or monthly payment, but it only makes sense if the new terms improve your overall costs.

Refinancing a home equity loan means taking out a new loan to replace your existing one, ideally with better terms that save you money or better align with your current needs. Here’s what to know about why people refinance, how the process works, what lenders require, and how to determine whether refinancing makes financial sense.

Table of Contents

1. Why would you refinance a home equity loan?
   1. Lower your interest rate
   2. Change your loan term
   3. Borrow more money
2. How to refinance a home equity loan
   1. Refinance to a new home equity loan
   2. Refinance to a HELOC
   3. Cash-out refinance on your primary mortgage
3. Requirements to refinance a home equity loan
4. Should you refinance your home equity loan?
   1. When it makes sense
   2. When it may not make sense
   3. How to calculate your savings
5. Frequently asked questions
   1. How much does it cost to refinance a home equity loan?
   2. Can you refinance a home equity loan with bad credit?
   3. How long does it take to refinance a home equity loan?
   4. Will refinancing a home equity loan hurt my credit score?

Why would you refinance a home equity loan?

Homeowners refinance their home equity loans for several reasons, but the most common motivations fall into three categories.

Lower your interest rate

This is the primary reason most people refinance. As a benchmark, you’ll want to see at least a 1% reduction in your interest rate to make refinancing worthwhile after accounting for closing costs.

A lower rate saves you money in two ways:

• First, it reduces your monthly payment, freeing up cash for other expenses.
• Second, it decreases the total interest you’ll pay over the life of the loan.

For example, let’s say you took out a $50,000 loan with a 20-year repayment term, and you have 10 years remaining.

If you were to refinance your loan with a 10-year term, dropping the rate from 8% to 6.5%, you’d save roughly $27 per month and $3,218 in total interest charges.

Change your loan term

Refinancing lets you adjust the length of your loan. Extending your term—say, from 10 years to 20 years—lowers your monthly payment but increases the total interest you’ll pay.

In the previous example, refinancing with a 20-year term would cut your payment by about $161, but you’d pay nearly $11,500 more in total interest.

Shortening your term does the opposite: your monthly payment increases, but you’ll pay less interest overall and become debt-free faster.

Borrow more money

If your home’s value has increased or you’ve paid down a significant chunk of your loan balance, you may have additional equity to tap into. Refinancing can allow you to borrow more than you currently owe, with the difference coming to you as cash.

Common uses for the extra funds include home renovations, consolidating high-interest debt, or covering major expenses like college tuition or medical bills.

How to refinance a home equity loan

The refinancing process involves checking current interest rates, researching loan options, submitting an application, and providing documentation such as pay stubs, tax returns, and proof of homeowners’ insurance. But before you start, you’ll need to decide which type of refinancing makes the most sense.

Refinance to a new home equity loan

This option replaces your existing home equity loan with another home equity loan, typically from a different lender offering better terms. You’ll still have a fixed interest rate and predictable monthly payments.

This makes sense when you want the stability of fixed payments and you’ve found a lender offering a significantly lower rate than your current loan. Some of the best home equity loan lenders include Spring EQ, SoFi, and New American Funding.

Refinance to a HELOC

Instead of replacing your home equity loan with another loan, you could refinance into a home equity line of credit. A HELOC provides a revolving credit line you can draw from as needed during a draw period (typically 10 years), followed by a repayment period.

The key difference is that HELOCs usually have variable interest rates, meaning your rate and payment can change over time. This option makes sense if you need ongoing access to funds rather than a one-time lump sum. Check out top HELOC lenders like Figure and Aven to learn more about your options.

Cash-out refinance on your primary mortgage

This approach refinances your first mortgage for more than you owe and uses the extra cash to pay off your home equity loan. You’ll consolidate both debts into a single monthly payment.

This makes sense when your primary mortgage rate also needs to be improved, or when you want to simplify your finances by having just one mortgage payment. Take a look at the best cash-out refinance lenders to evaluate your options.

Requirements to refinance a home equity loan

Lenders evaluate several factors when deciding whether to approve your refinance application. Here’s a look at what to expect:

• Credit score: Most lenders require a minimum credit score between 620 and 680, though the higher your score, the better your odds of qualifying for the best interest rates.
• Home equity: Lenders look at your combined loan-to-value ratio, or CLTV, which includes both your primary mortgage and your home equity loan. Typically, your CLTV must be between 85% and 90%, or lower. This means if your home is worth $300,000, your total mortgage debt generally can’t exceed $255,000 to $270,000.
• Debt-to-income ratio: Lenders typically want to see that your total monthly debt payments don’t exceed 45% of your gross monthly income. This includes your mortgage, the refinanced home equity loan, credit cards, car loans, and other obligations.
• Payment history: Your current home equity loan must be in good standing with no recent late payments.

Because eligibility criteria and pricing policies can vary from lender to lender, it’s a good idea to obtain quotes from multiple lenders to ensure you get the best possible terms.

Should you refinance your home equity loan?

Just because you can refinance doesn’t mean you should. Here’s how to determine if it’s the right financial move.

When it makes sense

• Current market rates are at least 1% lower than your existing rate.
• You can recoup closing costs within a reasonable timeframe (generally two to three years).
• Your credit score or home equity position has improved since taking out the original loan.
• You need to access additional equity for a worthwhile purpose.
• You want to switch from a variable rate to a fixed rate for payment predictability.

When it may not make sense

• Closing costs would exceed your savings in the near term. For example, if refinancing costs $3,000 but only saves you $50 per month, you wouldn’t break even for five years.
• You’re planning to sell your home within the next two to three years.
• You’re near the end of your current loan term and most payments are going toward principal.
• Your current rate is already competitive with today’s market rates.

How to calculate your savings

If you believe refinancing is right for you, be sure to run the numbers before you make it official.

Start by identifying closing costs, which typically range from 2% to 5% of your loan amount. On a $60,000 refinance, expect to pay $1,200 to $3,000 in fees.

Next, calculate your breakeven point. If refinancing costs $2,500 and saves you $75 per month, you’ll break even in 33 months. Any savings beyond that point are money in your pocket.

Finally, consider the total interest over the life of the loan. A lower monthly payment might look attractive, but if you’re extending your term significantly, you could end up paying more interest overall.

Frequently asked questions

How much does it cost to refinance a home equity loan?

Refinancing a home equity loan usually comes with closing costs, similar to what you paid when you first took it out. Costs typically range from 2% to 5% of the loan amount and may include appraisal fees, origination fees, title services, and recording fees.

Some lenders advertise low- or no-cost refinances, but those often come with a higher interest rate to offset the upfront savings.

Can you refinance a home equity loan with bad credit?

Yes, but it can be harder. Most lenders prefer a credit score in the mid-600s or higher, though some may approve borrowers with lower scores if they have ample home equity and stable income. Rates are usually higher, and options are more limited. If credit is very low, improving it first or exploring a cash-out refinance on the primary mortgage may lead to better terms.

How long does it take to refinance a home equity loan?

In most cases, refinancing takes about two to six weeks from application to closing. The exact timeline depends on how quickly paperwork is submitted, whether an appraisal is needed, and the lender’s current workload. Online lenders and credit unions can sometimes move faster than large banks.

Will refinancing a home equity loan hurt my credit score?

Refinancing can cause a small, temporary dip in your credit score due to a hard credit inquiry and the new loan appearing on your credit report. For most borrowers, the impact is minor and fades within a few months. Staying current on payments can help your score rebound and improve over time.