Can you refinance a home equity loan? What you need to know

Your home equity loan may have seemed like a great deal a few years ago. But you might start to wonder if you’re missing out on better terms. 

The good news is that you can refinance your home equity loan just like your mortgage. Refinancing a home equity loan can get you a lower interest rate, change your loan term, or roll multiple loans into one payment to make life easier.

With interest rates fluctuating and home values rising, now could be a great time to explore your refinancing options. Here’s how you can refinance a home equity loan.

Home equity loan refinancing: The basics

Before we dive in, here’s what you need to know about refinancing a home equity loan:

— Refinancing can potentially get you a lower interest rate, access to more money, or the option to switch from a variable to a fixed rate (which is rare but possible).

— There’s no limit to how many times you can refinance your home.

— To qualify for a home equity loan, you may need to meet minimum income and credit score requirements.

— You have several options when refinancing, including a home equity line of credit (HELOC), cash-out refinance, or another home equity loan.

Reasons to consider a home equity loan refinance

Refinancing a home equity loan can cut your monthly payments by hundreds of dollars or free up cash for major expenses. Here are some other reasons why people decide to refinance:

— Get a lower interest rate: When market rates drop or your credit score improves, refinancing can lock in a lower interest rate, reducing your monthly payments and interest.

— Shorten your loan term: A shorter duration lets you pay off the loan faster, helping you get rid of the debt sooner and save money on interest. But the shorter the loan term, the higher your monthly payments will be.

— Access more money: If your home is worth more now than when you got the original loan, refinancing lets you borrow against that extra value for big expenses like home renovations or paying off other debts.

— Consolidate debt: Refinancing can also make sense if you want to consolidate debt or other loans into one lower-rate payment. Instead of paying multiple high-interest loans, you might qualify for one monthly payment — that might even come with a lower interest rate.

— Switch to a fixed rate: In rare instances, home equity loans might have variable rates that fluctuate. Refinancing to a fixed rate gives you predictable monthly payments and protects you if rates increase. 

How to qualify for a home equity loan

Here's what lenders require before refinancing your home equity loan:

Credit score

Most lenders require a solid credit score, but it does depend on the situation. In general, a higher credit score unlocks a better rate. 

If your credit score has improved since you first got the home equity loan, you’ll likely qualify for better terms and lower interest rates than your existing loan. If you have a lower credit score than before, you still might be eligible for a refinance, though you may face higher rates. 

Income

Lenders might ask you to submit recent pay stubs showing your income is steady and high enough to afford the loan. They can also request bank statements, tax returns, and a list of your current outstanding debt.

Property and equity

Loan terms also depend on your property’s value:

— Combined loan-to-value (CLTV) ratio: Most lenders require a CLTV ratio of 75%, meaning you need to own at least 25% of your home's value outright after accounting for all loans secured by the property.

— Fresh home appraisal: You'll need a new appraisal to confirm your home's market value. The lender typically arranges this, but you pay for it, regardless of how recently you got your existing loan. 

— Collateral: Your property must have enough value to secure the new loan amount. This could be problematic if your local market has softened or you used up a large chunk of equity with your original loan.

Payment history

Your history with the existing home equity loan matters, especially if you're refinancing with the same lender. A good payment history can help offset other financial question marks. 

If you’re a reliable borrower, you might get more flexibility for your new loan, even if other aspects of your finances have changed. A history of late or missed payments could hurt your approval chances altogether.

3 ways to refinance a home equity loan

You have three main options when refinancing your home equity loan, each with different benefits depending on your financial goals. Here’s how each option works and when it makes the most sense:

1. Refinancing a home equity loan to a HELOC

A HELOC is a credit line that works similarly to a credit card, but it’s backed by your home's value, allowing you to borrow as needed up to a certain limit. HELOCs start repayment in a draw period (typically 5–10 years) with interest-only minimum payments, followed by a repayment period (usually up to 20 years) that requires you to repay both principal and interest. 

Before you switch to a HELOC, think about whether you need the flexibility of drawing money as you go, since that's the main advantage. The interest-only payment option during the draw period can also lower your monthly costs initially, but you should be prepared to pay back outstanding principal and interest when the repayment period begins.

If you're looking for a simpler way to lower your monthly mortgage payment, Better offers a streamlined, digital-first refinance option that can help you secure better rates and terms on your existing mortgage. Or, if you need cash fast, check out Better’s HELOC, where you can get approved for up to a $500,000 line of credit in as little as 24 hours.

2. Refinancing a home equity loan to a cash-out refinance

A cash-out refinance lets you replace your original mortgage with a new, larger loan, using the additional cash to pay off your home equity loan. This combines both loans into one payment, and you get cash at closing after paying off your existing home equity loan.

This works best when interest rates have fallen since you got your mortgage or you want to simplify your finances with one payment instead of two. The main benefits of cash-out refinancing are lower overall rates and simplified budgeting. But your monthly payment will be higher because you're borrowing a larger amount, and the closing costs could offset your savings.

3. Refinancing to another home equity loan

Simply replace your existing home equity loan with better terms by refinancing to a new loan. Doing so gives you a lump sum at closing that pays off your current loan, and you start fresh with new rates, terms, or loan amounts.

This option works well when you want to lock in a lower interest rate or change your loan terms to be more favorable. It can also give you access to more cash if your home has appreciated in value. Plus, since you’ve already established a payment history, you can likely get another home equity loan faster than other financing options.

Refinance your home equity loan with Better

Refinancing a home equity loan can be a smart financial move, whether you're looking to get a lower interest rate, switch from a variable to fixed rate, or access additional money from your home's equity. The key is understanding your options. Each refinancing approach has advantages and considerations, including payment structures, interest rate types, closing costs, and qualification requirements. 

Better makes exploring these refinancing options simple with a fully digital experience that lets you compare different loan types, get pre-approved quickly, and secure competitive rates with transparent pricing and no hidden fees. 

Try Better today and make refinancing easy.