More and more people have been inquiring about the possibility of refinancing a home equity loan or credit line, so we thought we post an article outlining the pros and cons and requirements to see if you are a good fit.
Many homeowners have taken out home equity loans and equity lines of credit to finance remodels, consolidate debt and even purchase an investment property. At some point, the borrower may find that the terms of your home equity loan or HELOC are no longer viable. In this case, a home equity loan refinance might be a wise option to consider. However, it’s crucial to evaluate all factors and explore alternatives before refinancing a HELOC or loan.
A home-equity loan can be a critical financial tool to access cash that is tied up in your home. With a 2nd mortgage or home equity line of credit (HELOC), you can pull out tens of thousands of dollars in cash to finance major expenses, such as home renovations or paying off credit cards. Home equity refinancing may be a smart choice for borrowers looking to convert from an adjustable-rate to a fixed-rate mortgage or for those wanting to access more of their home equity.
Can You Refinance a Home Equity Loan or HELOC?
What if you already have an equity loan or HELOC and interest rates have dropped?
Can you refinance a home equity loan?
Can you refinance a HELOC into a fixed rate home equity loan?
Generally, it’s possible to refinance a home equity loan for a lower interest rate, and other HELOC refinances are possible.
You simply need to crunch the numbers to decide if it’s worth it or not.
If you want to discuss refinancing a home equity loan or related topics, BDNationwideMortgage.com can help you today with a loan application and more.
What Are Benefits to Refinancing a Home Equity Loan
As we said earlier, you can refinance a home equity loan. This may be a good idea if you can obtain a lower rate now than when you got the loan. Refinancing your home equity loan also may be smart if you want to get out of your adjustable rate and into a fixed rate. Or, you may want to tap more equity, so you need to refinance. You also may refinance a HELOC into a a new home equity loan, or refinance an equity loan into a new 2nd mortgage with a lower interest rate, better terms or more cash out. You can even refinance a home equity loan into a HELOC if that better suits your needs.
Why Do People Refinance an Equity Loan or HELOC?
There are many reasons to refinance a home equity loan or credit line. Let’s review a few common scenarios:
Refinance a Home Equity Loan
People may want to refinance their home equity loan to a lower rate or different term. Or, you may want to pull more equity out of the home after its value has risen.
Also, you may wish to refinance an original home equity loan and consolidate credit card debt. You could get a lower rate on your loan, pull out more equity, and pay down some of your high-interest credit cards. Doing so could say you thousands of dollars in interest charges.
Another scenario is to refinance a home equity line of credit. This could be to get more cash or to change the loan term. Some may want to refinance a home equity loan into a HELOC for more payment flexibility. Check todays 2nd mortgage rates.
Refinance a HELOC
People may want to refinance a home equity line of credit to a fixed rate home equity loan. Or, they may wish to refinance their HELOC into a shorter or longer term. Refinancing a variable rate loan into a fixed rate loan can give you more financial stability and reduced stress. when the HELOC draw period ends, many borrowers will refinance their credit line into a new home equity loan with a better interest rate that is fixed. Find out the best home improvement loan rates available online today.
Refinance Personal Loan
If you roll a high-rate personal loan into a fixed rate home equity loan refinancing , this will probably reduce your interest rate. Your monthly payment will also drop, so it can be a wise move. Just remember that your home is on the line and you need to make your loan payments.
Refinance First Mortgage Into Home Equity Loan
A less common option is refinancing your first mortgage into an equity loan. You might do this without closing costs if your lender offers home equity loans with no closing costs. But you can only do this if your equity is more than is left on the first mortgage. The interest rate would need to be similar to what you would get with a regular mortgage refinance. Please keep in mind that this is a very rare situation.
Cash Out Refinance
If you have a first mortgage rate that is higher than market rates, doing a cash out refinance may be a smarter move than a second mortgage. You can get the cash you need and lower your rate. However, many current mortgage holders bought their homes or refinanced during the Pandemic. They may have 3% or lower rates and don’t want to pull out cash with a refinance. In that case, you would be better off with a home-equity loan or HELOC. Sometimes it is wise to refinance a home-equity loan int a cash out refinance. If your new 1st mortgage payment is lower than your existing mortgage and home-equity loan payment added up then the cash out refinance may be the prudent choice. BD Nationwide will match you with banks and lenders that offer cash out refinance and second mortgage programs.
What You Need to Home Equity Loan Refinancing
Before you apply for a new equity loan, take a look at your needs and finances. That way, you will have what you need for the application process:
- Meet home equity credit score requirements: A 620 minimum score is usually required to qualify, but a 700 or higher score will get the best interest rate. It may not be worth it to refinance for a lower rate if you have a lower credit score.
- Meet equity requirements: You typically need a 20% stake in the home to qualify for a home-equity loan or HELOC.
- Meet DTI requirements: The lender will want a debt-to-income ratio of no higher than 43% in many cases. This is your totally monthly debt payments compared to your gross monthly income.
- You will need financial documentation: 2 years of Tax returns, 2 years of W-2s, 1099’s, 1 month worth of pay stubs, homeowners insurance and mortgage statement records.
Also, understand why you want to refinance your home equity loan or HELOC. Do you mostly need the cash, or is it to change the rate or term? If you want to drop the rate, you need to have a higher credit score to get a better interest rate – at least 680.
What Loan to Value (LTV) Do I need to Refinance a HELOC or 2nd Mortgage?
For a home equity line of credit, the primary requirement is that your home provides sufficient collateral to secure the loan. Most lenders require a combined loan-to-value (CLTV) ratio of no more than 85%. So, that means that the total amount of your home-backed debts, including your existing mortgage and the HELOC or loan, should not exceed 85 percent of your home’s total value. In other words, you need to have at least 15 percent equity in your house.
When Will Home Equity Interest Rates Drop?
People who already have a fixed rate equity loan or HELOC may want to refinance, but interest rates in 2024 have them waiting. In May 2024, the Federal Reserve declined to cut rates because of inflation still being a problem in the US economy. The Fed hinted that a small rate cut was in the horizon. He is planning the next rate move to be a hike, but it looks like rate cuts are back on the table.
It’s hard to say when interest rates will fall. Some financial experts think variable and fixed interest rates will start to decline at the end of 2024, but they may not move much until 2025.
Ultimately, no one can predict with certainty when first or second mortgage rates will begin to decline. If the interest rates you’re being offered by home equity loan lenders are do not save you money, it might not be wise to proceed with the expectation that you’ll be able to refinance later. The timing of any potential rate drop is uncertain, and in the meantime, you could risk losing your home if you’re unable to keep up with your monthly payments.
If you are thinking about home-equity loans now with the idea of refinancing it to a lower rate, remember that we don’t know when rates will fall. They will eventually, but it could be years. If you can barely afford the loan payment now, you probably shouldn’t count on refinancing the loan any time soon.
What Is a Home Equity Loan?
A home-equity loan is a second mortgage that gives you some of your home’s equity in cash. Equity is the difference between the value of your home and what you owe on it. If your home is worth $300,000 and you have a $100,000 balance, there is $200,000 of equity available. You can usually tap 80% of the home’s value, minus what you owe. So, in this example, you could get up to $160,000 in equity if you qualify.
Home equity loans have fixed rates and terms and generally run between 7% and 11% as of August 2024, but your rate could be different. Loans usually run for 10 to 20 years. If interest rates drop significantly while you have your loan, you may look at refinancing. Just remember you will need to pay for closing costs and could need a new appraisal.
On the other hand, a HELOC is a line of credit with a variable rate. You only pay interest on the money that you take out, and the draw period is 10 years, with interest only due. When the draw period ends, you must pay principal and interest. Some borrowers prefer a HELOC because the rate can go lower, but there is a risk it could rise, too.
