Can You Refinance an Equity Loan?

You can refinance nearly any loan you have taken including a equity loan. However, just because you can refinance your loan does not mean it is a good idea. Many refinancing schemes will harm your credit, cost you money or otherwise lower your status as a borrower. Therefore, it is important to consider the unique features of your equity loan as well as your loan options before refinancing.

Structure

The structure of your equity loan and contract will give you insight into your ability to refinance. Start by looking at your contract terms. There will be a section regarding modification or early payment of the loan. Most likely, the lender will quote a penalty for paying off the loan early. With some loans, this penalty will be so high it will make refinancing a costly option. In other scenarios, you will see your lender has left room for negotiation.

Options

There are two main options when refinancing an equity loan. First, you can refinance directly with the lender. This option will likely cost you the least and will not harm your credit. However, it is also the hardest option to secure since your lender has little incentive to lower your rate or change your terms. You are most likely to secure this option if you have had a significant change in your ability to pay or if the market dictates the change. A second option is to refinance by taking a new loan to pay off the existing loan. This option may present penalties and damage to your credit if your original lender is unhappy with your decision. However, this is also the easiest option since a new lender will be happy to entice your business. Whatever the case, only refinance if it will save you money either by lowering your rate or making your monthly payments more affordable.

Considerations

With an equity loan, you have a lien against the collateral you used for the original loan. This makes refinancing a bit more risky; it is important to make sure that lien is replaced or modified if you move to a new lender. If you are choosing a cash out refinance, meaning you are refinancing to a larger loan balance, you may need to add more equity to the collateral. Do not make the mistake of thinking your equity cannot be seized in the case you default. For example, if you have an equity loan against your home, even if your mortgage is in good standing, the equity lender can foreclose on your home by buying your mortgage. Always know what you have at stake in an equity loan.

Alternatives

One option to explore if you are considering refinancing an equity loan is loan consolidation. Here, you would be combining your equity loan with another loan, often a mortgage. This option can make your payments more manageable, and it can give you financial flexibility. Consider options such as the Federal Housing Administration streamlined refinance option or the Department of Veterans Affairs refinance program if you qualify.