Can Equity Loans Be Refinanced?
- Standard fixed rate mortgages have terms of 15 or 30 years although some lenders write loans with terms of different lengths. You can also refinance into an adjustable rate mortgage if interest rates on fixed loans are very high. Home equity loans have terms ranging from five to 30 years. If you want to pay off your home more quickly, you can refinance into a short-term home equity loan; and if you want to keep payments low, a long-term loan provides you with the smallest monthly payments.
- Lenders often waive closing costs, such as underwriting fees and home appraisals, for borrowers who agree to keep their equity loan in place for a specific number of years. If you pay off the loan early, the lender recoups those costs by adding the fees to the balance of your loan. Make sure you find out about any pre-payment penalties, before agreeing to refinance, as the fees are sometimes substantial. Additionally, fees for refinancing with a mortgage are significant so weigh the out-of-pocket costs with the monthly payment savings before you proceed with a refinance.
- Lenders require homeowners to purchase Private Mortgage Insurance (PMI) if the total amount being financed, through a mortgage, exceeds 80 percent of the value of the home. Lenders do not require homeowners to purchase PMI if they take out a second lien home equity loan that, combined with the first mortgage, means they have financed more than 80 percent of the value of their home. If you pay off your equity loan with a refinance mortgage, you may have to start paying PMI, which could offset your interest rate savings.
- When you make payments on a conventional mortgage, the payments usually go toward principal, interest, insurance and property tax. The mortgage company holds money for taxes and insurance in an escrow account and pays your property tax and insurance premiums from that account when payments are due. Banks do not establish escrow accounts for home equity loan borrowers. If you currently only have an equity loan on your home, you will have to start budgeting your tax and insurance if you refinance with a conventional mortgage. This means your monthly payments are larger, and you cannot earn interest on funds set aside for taxes and insurance by holding the funds in your own savings account.