With second mortgages like home equity loans and home equity lines of credit (HELOCs) growing in popularity lately, I figured it’d be prudent to talk about next steps.
For example, what happens if you want to refinance the loan, either to switch loan programs or to obtain a lower rate?
Well, similar to a first mortgage, there are lots of refinance options for HELOCs and home equity loans too.
In fact, you can even pay off the HELOC or home equity loan with your first mortgage.
Although with interest rates on existing first mortgages so cheap at the moment, that’s probably not going to be the move!
Can You Refinance a Home Equity Loan?
| Old Home Equity Loan | New Home Equity Loan | |
| Balance | $50,000 | $100,000 |
| Interest Rate | 8% | 7% |
| Loan Term | 20 years (15 remaining) | 20 years |
| Monthly Payment | $418.22 | $775.30 |
Yes. Similar to a first mortgage, you can refinance a home equity loan in order to take advantage of a lower rate.
Or to obtain a larger loan amount, perhaps because you need to borrow more money for additional projects or expenses.
You can also refinance the loan if you’re looking for a different type of loan, or to consolidate the loan into a first mortgage.
It’s also possible to reduce your monthly payment by extending the loan term, assuming you are okay with paying additional interest.
Conversely, it’s possible to refinance the home equity loan into a shorter-term loan to reduce the interest expense and pay it off sooner.
Long story short, you’ve got lots of options assuming you are creditworthy and qualify for a new loan.
Check out my example above, where an existing home equity loan is refinanced into a new one, with a larger balance.
The monthly payment goes up since you’re borrowing double, but the rate goes down slightly because rates fell from the time the loan was first taken out (hypothetical scenario).
Note that you don’t need to borrow more when refinancing. you can simply refinance to a lower rate if it’s available. Or to a shorter or longer term.
Can You Refinance a Home Equity Line of Credit?
| Old HELOC | New HELOC |
|
| Balance | $50,000 | $100,000 |
| Interest Rate | 8.5% | 7% |
| Loan Term | 30 years (20 remaining) | 30 years |
| Monthly Payment | $433.91 | $583.33 |
Yes, you can refinance a home equity line of credit too. Some banks will even let you conduct a HELOC refinance in-house via a streamlined process.
So it can be very simple and fast, assuming you stay with the same bank. And doing so will allow you to borrow more (larger credit line) and obtain a brand new draw period, which is typically 10 years.
For example, if you’ve had your HELOC for nine years and it’s about to shift to the repayment period, you could refinance it and extend the draw period another decade.
The one caveat with this is banks will typically require you to pay principal and interest each month, instead of interest only.
But if you refinance your HELOC with a different bank or lender, you might be able to obtain a new draw period that only requires interest-only payments.
And you should probably shop around anyway to see if an outside bank/lender has a better rate than what your current bank offers.
Just be sure to pay attention to all the terms, closing costs, early closure rules, etc.
In the example above, the old HELOC is refinanced into a new HELOC, with a new 10-year interest-only period and a lower rate (thanks to a better margin!) from a different bank.
The monthly payment goes up by about $150, but you’ve now got another $50k at your disposal and can make interest-only payments again.
Again, you don’t need to borrow more when refinancing. you can simply refinance to a lower rate if it’s available. Or extend your loan term and/or interest-only draw period.
Can You Pay Off a HELOC with a Home Equity Loan? Or Vice Versa?
The short answer is yes. If you have a HELOC and want a home equity loan instead, you can pay off the HELOC with the funds from a home equity loan.
This way you can lock in a fixed interest rate if you’re worried interest rates are going to move higher.
The main downside to a HELOC is that the interest rate is variable (tied to the prime rate), so the peace of mind that comes with a fixed-rate home equity loan might be worthwhile for some.
The opposite is also true if interest rates are falling and you want the optionality of a HELOC.
You could pay off the home equity loan with a HELOC, which might have a lower interest rate that could even go lower, if the Fed is expected to cut rates in the future.
In addition, you would have a line of credit that could possibly be drawn upon beyond the balance paid off. And you’d be able to make interest-only payments.
For example, if you paid off a $50,000 home equity loan with a $100,000 HELOC line, you’d have another $50,000 at your disposal.
You could borrow more if needed and continue to borrow during the draw period, with interest-only payments if you wished.
So you’d get a bit more flexibility there, though remember HELOC rates can also go up!
The only issue with this arrangement is whether the lender will allow you to pay off the home equity loan with the HELOC at closing. Be sure to ask before you proceed.
How Can I Lower the Rate on My Home Equity Loan?
| Old Home Equity Loan | New Home Equity Loan | |
| Balance | $50,000 | $50,000 |
| Interest Rate | 10% | 7% |
| Loan Term | 20 years (15 remaining) | 20 years |
| Monthly Payment | $482.51 | $387.65 |
If you’re looking for a lower interest rate on your home equity loan or HELOC, you’ll want to look into a refinance.
The examples from above involved taking out larger loan amounts in order to borrow more.
But it’s also possible to refinance one of these types of loans without borrowing more, simply to get payment relief.
And it would make sense if interest rates improved since you first took out your loan.
For example, if you obtained a home equity loan when rates were 10%, and they’ve since fallen to 7%, you could potentially save a good amount of money.
In my example above, about $100 per month. Not too shabby, though you are resetting the clock with a new 20-year term.
If you have a HELOC, it’s likely a variable rate loan and the rate may have automatically fallen over time if rates improved thanks to a lower prime rate.
In this case, you might not need to refinance to take advantage of a lower rate.
How Much Does It Cost to Refinance a Home Equity Loan?
Like everything else, it depends. You might be subject to a loan origination fee, which is typically percentage based.
For example, if you refinance a $50,000 home equity loan and there’s a 1% fee, it’d be $500. A 2% fee would be $1,000.
But it’s also possible to refinance into a new home equity loan (or line) with no closing costs or fees whatsoever.
However, the catch is the interest rate will likely be higher, all else equal. But if you shop around enough, you might be able to find a low rate without the fees.
This is all the more reason to gather multiple quotes from several banks and lenders to explore what’s out there.
You Can Also Pay Off a HELOC or Home Equity Loan via First Mortgage Refinancing
Another way to pay off a HELOC or a home equity loan is simply by refinancing into your first mortgage.
So we know you can refinance an existing HELOC with another HELOC, or existing home equity loan with a new home equity loan.
Beyond that, you can pay off one these second mortgages with your first mortgage and combine the two loans into a single loan.
Today this doesn’t make a lot of sense in most situations because the majority of homeowners have very low fixed-rate first mortgages. And when you refinance, you lose that low rate.
For example, if you have a $300,000 first mortgage set at 4% and a $75,000 HELOC, you could refinance the loans into a single loan for $375,000.
However, the combined loan amount would result in a higher loan-to-value ratio (LTV). But if you had plenty of home equity, it might not be an issue.
Say the property is worth $500,000. The new LTV would be 75%, which is a fairly low LTV and one that wouldn’t be subject to too many loan-level price adjustments (LLPAs).
Another thing you need to consider is if the second mortgage you’re refinancing is paid off via a first mortgage, it will be considered a cash-out refinance, even if you don’t take extra proceeds, assuming it was a non-purchase money second mortgage.
So the price adjustments that apply to cash-out refinance will be in play, potentially leading to a higher mortgage, all else equal.
To sum things up, home equity loans and lines aren’t much different than regular mortgages, just in the second lien position (assuming you don’t have a first mortgage).
This means the same options are generally available to refinance them, switch loan programs, or pay them off at varying speeds.
There are even options to get a fixed-rate HELOC or apply a fixed interest rate to a portion of your credit line. So there’s some crossover between the products these days.
Be sure to consider and understand all your options if you’ve got one of these loans, or are thinking about applying for one.
Read on: Cash Out vs. HELOC vs. Home Equity Loan
