What to know about home equity refinancing

If you have an existing home equity loan and need to fund a new project, take advantage of lower interest rates, or even change payment terms, you can create flexibility through home equity refinancing. You might even consider refinancing into a home equity line of credit.

What can refinancing your home equity do for you?

Many factors change in the years after you take out your original home equity loan, and many of them are a good cause to consider home equity refinancing. Refinancing your home equity loan could help you:

• Reduce your monthly payment
• Lock in a lower interest rate
• Switch from an adjustable rate to a fixed rate for more stability, or vice versa
• Borrow additional funds for a new project or need
• Shorten or extend repayment terms

Once you have determined you could benefit from home equity refinancing, there are preliminary steps you can take to make sure you are getting the most from your new loan:

• Calculate how much equity is currently available to borrow against: Using the loan-to-value ratio, you can gain insight into the equity on your property. Don't forget to subtract the amount of your existing home equity loan from the value.
• If you are looking to borrow additional money, establish your borrowing needs: Do you have a specific need for which you need to borrow? How much additional cash do you need to accomplish your goals? Make sure there is enough equity in your home to cover the additional borrowing.
• Set realistic payment goals: You are taking out a completely new loan. This means you will be resetting the payment terms and the number of monthly payments. Choose a loan that works best with your current financial situation and needs. Remember interest rates are typically lower on shorter-term loans and loans that carry a variable rate. Take that into consideration when selecting a new home equity loan or line of credit.
• If you are refinancing to lower your payments, do the math: Remember, when you refinance a home equity loan, make sure you’re aware of any closing costs or other fees. Determine how many months it will take you to cover the fees. It's not worth refinancing your home equity loan if your fees negate your monthly savings.
• Consider your current situation: A lot may have changed since you originally took out your home equity loan. Before you apply, find out what documentation lenders are looking for and check your credit score to see if you qualify for the lender’s best pricing.