How To Qualify To Refinance Home Equity Loan?
If you are looking for a valuable financial tool for that home improvement or to pay for a massive debt with a high-interest rate, then home equity loans can indeed be helpful.
Home equity loans and lines of credit have proven to be very helpful to people who have been using these financial tools. The fun thing is that you are using the value tied to the house you own without selling it.
So, how does a home equity loan work? You get a lump sum of money, which you pay back throughout a set of years at a flat rate. Sounds profitable, right? More so, if your credit score has gone up or if the rates have dropped, there is a chance for you to refinance a home equity loan.
But, before you consider refinancing your home equity loan, go through this article for some valuable information you must know.
How To Qualify To Refinance Your Home Equity Loan?
The first and basic concept you must learn here is what refinancing is. If you want to refinance a home equity loan, you must pass the test. It is similar to the first loan you applied for and got approved. Even for the home equity loan, you must qualify before you are able to take a new loan.
Just having the previous loan does not qualify you for the second loan. Most of the financial institutions usually ask for an adequate collateral to back up your loan. In this case, you will be using your house as the collateral for the second loan you want. The financial institution you reach out to might ask you to have a combined loan-to-value ratio of more than 85%.
Conditions Affecting The Refinance Of Home Equity Loan
Alright, here is a more straightforward explanation – the debt you owe for the previous loan (home equity loan) should not be more than 85%. In other words, you must have 15% of the value backed by your home free and in your hand.
Since you already have a loan running on the property, you passed the previous test. But there might be some complexities given the home equity value decreases which is possible but a very common case. Only if the housing market softens will you have a lower home equity value.
Also, if you have already opted for a cash-out refinance and take out a massive portion of your house’s equity, there is a chance for you to disqualify from refinancing your home equity loan.
Credit Score Requirements
You have to also meet the personal financial credit score requirement to refinance your home equity loan. Having a fair and clean credit score (580, at the least) is important. However, the financial institutions will ask for a score of 620 minimum when asking for refinancing.
Borrowers need to have high credit scores and high standards in terms of their financial history to qualify for a refinance. Because they already have a mortgage loan going on, and they are asking for a second loan on top.
Monthly Gross Income
Also, the creditor refinancing you fall in line with the primary creditors if you were to default. But, having a high credit score above 620 is also helpful. The higher your credit score, the lower the interest rate you are offered during a refinance.
If you are qualified with the credit score, the next test is with the monthly income. You must have a monthly income enough to sustain your needs while also allowing you to make payments for your loans. Only 43% of your gross income should be able to cover your monthly bills.
When you want to refinance a home equity loan from the same lender, you need to show a good track record of paying off your loan within a fixed time frame. Missed payments or late payments do not count as a good repayment record. So, if you have paid off your regular repayments in time, you are on the luckier side.
Refinance Home Equity Loans: Pros & Cons
If the refinanced home equity loan has a lesser interest rate, then choosing it would lower your monthly payments. So, in the long run, you will make a lesser and lesser number of loan payments. However, there are some significant downsides as well. For example, if you are switching to a fixed rate through a refinance of a home equity loan, then you are losing out on the opportunity of a lower interest rate.
Here are some pros and cons you must read before you choose to refinance a home equity loan.
Pros
- If you get a lower interest rate for the second loan, then your monthly expenses will get lower.
- By locking into a fixed rate, you will be able to rule out the possibility of a high-interest rate payment.
- It is possible to change the terms of your payment. That way, you can repay it much faster or spread it over a longer period and have a lower monthly payment rate.
- Also, you can opt for a much larger amount in loan if you need some extra cash.
Cons
- A borrower must pay a closing cost, usually around 2% to 5% of the entire loan amount. So, if you want the refinancing to be worth having, you need to save more amount than what the fees cost you.
- Also, there is a chance for you to miss out on the opportunity of a low-interest rate through an adjustable rate you had earlier.
- Refinancing usually pays off the original home equity loan you previously paid for. Then, it replaces it with a new loan. So, there is a chance for you to be liable for a repayment penalty.
Final Words
When choosing to refinance your home equity loan, you must qualify for it first. It is important to meet all the different criterias mentioned above. However, you must also shop around and find a lender who credits the loan with a lower interest rate. But, before you apply or consider refinancing, clearly understand how it will affect you financially. What liabilities will it impose upon you, and what problems will it solve? That way, you will make a better financial decision.
Hopefully, this article helped you to understand home equity loan refinancing. Do you have any queries you want us to answer? Please go through the comment section and let us know.
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