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Can You Refinance A Home Equity Loan Into A Mortgage

    You may be able to refinance your home equity loan, replacing it with a new home equity loan or new Home Equity Line of Credit (HELOC), or you may be refinancing to a new, larger first mortgage. A cash-out refinance allows you to replace your current mortgage with another loan with a new repayment term, or convert home equity into cash — and use that cash to pay for a variety of common expenses. The downside to cash-out refinancing is that it replaces your current mortgage, which can mean trading in your lower interest rate for a higher interest rate.

    Cash-out refinancing would lead to a new repayment amortization schedule, which shows you what payments to make each month in order to repay your mortgages principal and interest over the life of your loan. Because cash-out refinancing replaces your existing mortgage, there are some important considerations; for one, it can lengthen your overall repayment schedule for the mortgage. Keep in mind, the refinance is basically another loan, or mortgage, with a new timeline, meaning that you might take longer to repay another loan.

    If you had a lower interest rate on your first mortgage than lenders are now offering, a refinance would make no financial sense. Even if you are able to secure a lower rate with a refinance, a first mortgage may have considerably higher closing costs, potentially amounting to 2 percent to 5 percent of the loan. Refinancing a loan usually makes the most sense when you have monthly savings from the mortgage payments and lower interest rates, and you are able to remain in your home until the savings exceed the amount paid for closing costs. You will pay higher closing costs and fees when you refinance a home for cash, but there is a chance they are outweighed by competitive interest rates available in todays market.

    For example, if you opt for a home equity loan to pay down a HELOC, you may pay lower closing costs than with a traditional mortgage, and also, you may enjoy lower interest rates than you would have had on a HELOC. You might be able to have a cash-out refinance, so that you could convert the HELOC to a mortgage, although that will only work if you receive enough cash to repay the HELOC. If you are using the new HELOC to pay off an existing HELOC, you cannot deduct the interest that you paid on that loan. If you have significant equity in your home, you may qualify to refinance your HELOC with bad credit.

    If you do not have enough equity to qualify for refinancing, you may be able to take out a personal loan. In either case, the amount that you can borrow or refinance will be dependent on how much equity you have in the house. You can still qualify for refinancing your home equity loan with a lower score, such as 620, but you will pay a higher interest rate and you might need to borrow less than if you had a higher score. A home equity loan can be a good option if you need large amounts of cash in one lump sum, and it has a lower interest rate than what you would receive on a new mortgage.

    On the plus side, home equity loans allow you to keep your original mortgage terms, which can be nice if you are well into the repayment program, where a larger portion of your payments are going to the principal balance rather than interest. Most lenders will want you to have a combined loan-to-value ratio no higher than 85 percent, meaning that your total mortgage balance is equal to no more than 85 percent of the overall value of your home. You will have to have sufficient home equity once you have taken out a new loan to satisfy a lenders guidelines on a combined loan-to-value (CLTV) ratio. The balances on your first mortgage and your second mortgage should typically total no more than 85 percent of the home equity, if you are only looking to refinance the existing balance.

    While you probably would have met that benchmark before getting the loan for equity in the house to begin with, you will have to take another look at that number if you decide to refinance — chances are, the value of your home may have dropped since you took out your first loan. If your creditworthiness has declined since you first took out your loan, or you owe more than your house is worth now, you might not get approved to refinance. If your home has lost value in recent years, you may not get approved for this refinancing option. If you are having a hard time making payments on a home equity refinance loan because your income has decreased or the payments are increasing, you might want to consider a home equity modification.

    If you decide that a refinance is not the right move for you, there are other options that you could look into if you need to lower the cost of the loan. If the current rates are lower than the initial rates for a home equity loan, or HELOC, refinancing could lower your monthly payments, offer you a lower interest rate, and could even lead to a more favorable loan terms in general, like allowing you to go from variable to fixed rates.

    Refinancing may be a wise move, as a first mortgage–the one you used to purchase the house–will typically have a lower interest rate than a second mortgage. Cash-out refinancing results in a new mortgage that can have a different terms than your original loan (meaning that you could have a different loan type and/or interest rate, as well as a longer or shorter period for paying down the loan).

    In short, unless you are simply taking out your first mortgage or your second, it is probably okay to use cash-out refinance to pay down a HELOC. If you have a fair amount of equity and credit, using a cash-out refinance to consolidate your HELOC is likely easier than you thought.

    If you are nearing the end of the repayment term on a HELOC, and cannot afford the higher new payments, you might want to think about refinancing the HELOC. This option works best if you have a reasonably large balance on your HELOC, or if refinancing would allow you to lower your current mortgage interest rate as well.

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