Can you refinance a home equity loan?

To refinance your current home equity loan, you can either:

• negotiate new rates and terms with your current home equity lender,
• take out a new home equity loan (to pay off the existing home equity loan) with a new lender, or
• refinance your mortgage and home equity loan together through a cash-out refinance.

While a lower rate or lower monthly payment may be an attractive option, be sure to account for closing costs when refinancing or taking out another home equity loan. It is also important to consider how much longer refinancing your home equity loan will extend the loan’s lifetime.

Reasons to refinance your home equity loan

Before you refinance a home equity loan, be sure to understand your financial goals so that you can choose a product that best matches your needs. The following are some common reasons why you may want to consider refinancing your home equity loan.

Lock in a lower interest rate

If you can replace and/or consolidate your existing loan with a new loan that features a lower interest rate, you can lower your monthly payments or reduce the interest charges over the life of the loan.

Convert to a fixed rate

If you have an adjustable rate or variable rate home equity loan, converting to a fixed rate loan can offer more stable rates, making it easier to budget for your monthly bills.

Adjust your repayment terms

When you refinance a home equity loan, you can choose to shorten your term to pay off the loan faster (and save on interest charges) or lengthen the loan to reduce your monthly payments.

In either case, be sure to calculate how much money in closing costs and interest charges it will take to pay off the loan. Generally, loans with longer terms will include more interest charges over the life of the loan, while shorter terms mean fewer interest charges.

Borrow more

If you have a new need to borrow, taking out a new home equity loan or using a cash-out refinance can pay off your existing home equity loan, and you can use the remaining cash as needed.

Risks to consider when refinancing a home equity loan

When considering any financial decision, it’s always important to evaluate costs and risks. As you consider refinancing your home equity loan, be sure to look out for prepayment penalties and additional borrowing costs.

Prepayment penalties

Paying off your existing home equity loan may incur prepayment penalties.

Before you pay off your home equity loan, be sure to review the terms of your loan and consult the original lender to understand if prepayment penalties will be applied.

If there are prepayment penalties on your original home equity loan, you can also ask your new home equity lender to see if they can help to pay any prepayment penalties.

Additional borrowing costs

Any time you take out a loan you can expect some sort of cost to be associated with closing the deal. From appraisals to closing fees, the cost of refinancing has to pay off in what you will save with your new loan.

3 ways to refinance your home equity loan

There are three basic ways to refinance your current home equity loan:

Earn a new loan to pay off your existing home equity loan

You can take out a new home equity loan from Discover® to possibly lower your interest rate or adjust your term length and pay off your existing home equity loan in full, with any cash remaining to use as needed.

Refinance your home equity loan with existing lender

Working with your original lender, you can use improved financial measures (such as an improved credit score or increased income) to negotiate a new loan agreement with more favorable rates.