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Refinancing a Home Equity Loan: Is It Possible? Is It a Good Idea?

Refinancing a home equity loan is possible and can provide homeowners with several important benefits, including a lower monthly payment and a fixed interest rate.
 
However, there are some important caveats to refinancing a home equity loan that should be taken into consideration before making a final decision.
 
At Credit Union of Southern California (CU SoCal), we make getting a Home Equity Loan easier.
 
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all of your banking needs.

 

Get Started on Your Home Equity Loan Today!

What is a Home Equity Loan?

A home equity loan lets you borrow money from a lender—such as a credit union, mortgage company, or bank — against the equity in your home. The loan amount that a borrower is eligible for is determined by the “equity in the home,” which is calculated by taking the difference between the home’s market value and the remaining mortgage balance.
 
Funds from a home equity loan can be used for any expenses, including home renovation, medical bills, or to pay off high interest credit card debt.

Home Equity Loan Refinancing Requirements

Refinancing a home equity loan is similar to refinancing your mortgage. It involves getting a new loan to pay-off and replacing your original loan. It is always smart of shop around to get the best rate and terms possible.
 
Start by speaking to a representative at the financial institution where you have your current loan. Credit unions, including CU SoCal, offer reasonable loan rates and lower closing costs than you would find at a traditional bank.
 
Each lending institution will have its own requirements specific to how they do business.
 
Here are some general requirements that most lenders will look for when evaluating a borrower’s loan application: 

• Equity In The Home. Equity of at least 15% to 20%.
• Good Credit Score. Typically lenders look for a score in the mid-600 range.
• Sufficient Income. Lenders will ask to see your W2s or 1099s and use these to evaluate your debt-to-income ratio and your ability to repay the loan.
• Low Debt-To-Income Ratio (DTI). Most lenders require a DTI ratio of 43% to 50%.
• Reliable Payment History. Have you paid your current mortgage on time or do you have missed or late payments? Lenders want to know you’re a reliable borrower before they approve the loan.

Benefits Of Refinancing Your Home Equity Loan

If you’re a homeowner who already has a home equity loan, you may be wondering, should I refinance my home equity loan? There are definitely benefits, including getting a lower interest rate.
 
Here are several other benefits of refinancing a home equity loan:

1. Lower Monthly Payments. Refinancing to a lower interest rate than what you are paying now, means you pay less in monthly payments as you repay the loan.
2. Convert an Adjustable Rate to a Fixed-Rate Loan. If your current home equity loan has an adjustable or variable rate, refinancing to a fixed rate will give you payment predictability so you know exactly how much you owe each month. You could also save money by locking in a lower fixed rate.
3. Shorter Loan Term. Refinancing to a shorter term (for example switching from a 20-year loan to a 10-year loan, means you’ll be able to pay off the loan sooner and save money on interest.
4. Avoid a Balloon Payment. If you have a home equity loan that allowed you to pay interest-only rather than interest plus principal, you will have a “balloon” payment at some point, which includes the principal amount still owed on the loan. Refinancing would pay off your current loan before the balloon payment is due, and give you a new loan with a new payment rate and term.
5. Take More Cash Out of Your Home. If you’re still in need of cash, refinancing gives you the opportunity to increase the loan amount, if you have the equity to do so.

How To Prepare For Refinancing Your Home Equity Loan

Following these tips before you apply to refinance will make the process and repayment of the loan easier:

1. Calculate Your Home's Equity. Home equity is the dollar portion of the home that you own based on how much you owe on your mortgage and any other secured loans that use the house as collateral. If you do not have a mortgage on your home then you have 100 percent equity in the home. People who have a mortgage own only a percentage of the home (the lender who holds the mortgage also owns a percentage of the home). As you pay down your mortgage your equity increases until the mortgage is paid in full and you have 100 percent equity. To calculate equity, take the amount your property is currently worth, or the appraised value, and subtract the amount of any existing mortgage on your property. For example: Appraised value is $600,000 – Amount owed on mortgage is $250,000 = $350,000 Equity
2. Decide Why You're Borrowing. A home equity loan is a huge financial commitment, and is often referred to as a “second mortgage.” Before you sign for the loan, be sure that you really need the funds and that you will be able to make on-time monthly payments.
3. Plan For Making Repayments. This means taking an honest look at your financial situation, assessing your job security and income, and creating a budget to help ensure you can make on-time repayments. Home equity loans require the borrower to start repaying right away, whether you use the money or not. Some lenders will even charge an “inactivity fee” if you do not use the loan.
4. Gather The Necessary Documents. If you’re truly ready to move forward with a loan application, be sure to have your W2s or 1099s handy, as these will be needed. You may be asked to show proof of payments on your current mortgage loan and current home equity loan. The lender will ask for permission to run your credit score.

Options For Refinancing Your Home Equity Loan

Cash-Out Refinance. Cash-out refinancing is when a homeowner refinances their mortgage to a new mortgage (typically at a lower interest), and in the process, borrows more money than what is needed to pay off the current mortgage. The first mortgage is paid off and the homeowner gets a lump-sum payout of the extra cash amount at closing. With a cash-out refinance, homeowners can use the cash-out to make home repairs and improvements, pay for college, a wedding, business expenses, and even pay off high interest debt. Instead of having two separate loans as you would with a home equity loan, you’ll have one convenient loan payment.

Learn more about the Differences Between a Cash-Out Refinance and a Home Equity Loan.
 
Home Equity Line of Credit (HELOC). A Home Equity Line of Credit (HELOC) is a type of “revolving” credit that is provided by a lender which has a credit limit, a variable interest rate, and which is secured by the equity in your home. Most HELOCs have a 10-year “draw period” during which money can be borrowed. If you are approved for a HELOC, you can use as much or as little of the total loan amount as you like, and you will only pay interest on the amount you use. (Remember, with a home equity loan you pay interest on the full loan amount.)
 
Before you refinance your home equity loan, take time to review these Home Equity Loan Pros and Cons.

Drawbacks Of Refinancing Your Home Equity Loan

As with any loan, there is financial risk. Some drawbacks of refinancing a home equity loan include:

1. Fees: While most credit unions charge low fees or may even waive fees, there may still be fees associated with refinancing. For example, you may need to pay for a new appraisal. Be sure to ask your lender if they charge a “pre-payment penalty” if you pay off your current loan before the end of the term.
2. Home Is Used As Collateral. A home equity loan is a type of “secured” loan that uses your home as security. As you are probably aware, this means if you make late payments or fail to repay the loan, the lender can put a lien on your home or even foreclose and take possession of your home.
3. Risk Of Going Upside-Down On Your Loan. In some cases, homeowners end up owing more in loans than their house is worth. This “negative equity” can affect a home sale if the amount received for the home is less than the amount owed on the mortgage and outstanding home equity loan. In this case the homeowner would still owe the bank money; this is called a “short sale.”

Is Refinancing A Home Equity Loan Worth It?

Is it possible to refinance a home equity loan? Yes, it is! However, only you can decide if refinancing your home equity loan is worth it. Before you do, consider your answers to these questions:

• Can you afford to continue making payments on the loan amount you need, without jeopardizing making on-time payments elsewhere?
• Do you really need the money or are you using it for luxury item purchases that can be put off till a loan isn’t needed to make the purchase?
• Will refinancing your loan create a debt-cycle you can’t get out of?

If you have any doubts about your ability to repay the loan, please consider speaking with a financial counselor. There may be other ways to get the money you need, such as a Personal Loan.

Features of a CU SoCal Home Equity Loan

A CU SoCal home equity loan lets you to leverage the equity in your home to help you achieve your financial goals. Whether you’re looking to start that big renovation, make emergency repairs, or simply need additional cash-on-hand, we’re here to help make it happen with:

• No points.
• No appraisal fees for single unit loans.
• No annual fee.
• No closing costs.
• A generous limit up to $250,000.
• Possible tax deductions on interest payments (when the funds are used for home improvements).

Why Savvy Consumers Choose CU SoCal

For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
 
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.

Get Started on Your Home Equity Loan Today!