Refinancing a home equity loan: Options, costs and eligibility

Written by Samantha SheltonNMLS 1647301Updated November 2026

Refinancing a home equity loan means replacing your existing second-lien loan with new terms, and you have three ways to do it: a new home equity loan, a cash-out refinance that folds the balance into your first mortgage, or a HELOC. Freddie Mac tells homeowners to expect to spend 3% to 6% of the loan principal to refinance a mortgage, which makes your break-even point the number that decides everything: divide those costs by your monthly savings and you get the number of months it takes to come out ahead.

How much you can move depends on your combined loan-to-value ratio (CLTV), both loan balances divided by the home’s appraised value. Lenders in Align’s network typically cap CLTV at 85% to 90% on a second-lien home equity loan. Take the cash-out route and the ceiling drops: Fannie Mae’s Eligibility Matrix caps a cash-out refinance on a one-unit principal residence at 80% LTV.

Learn which path fits your situation, what credit, DTI and CLTV lenders look for, and how to run the break-even math first. Our refinancing and home equity guide covers the wider category.

Key takeaways:

• Three paths, two different ceilings: A new second-lien home equity loan usually tops out at 85% to 90% CLTV with lenders in our network, while a conventional cash-out refinance is capped at 80% LTV on a one-unit primary home.
• Break-even decides it: Freddie Mac puts refinance costs at 3% to 6% of loan principal, so divide your total costs by your monthly savings to see how many months you need to stay put before the refinance pays for itself.
• Shop it, don’t settle for one quote: Credit-scoring models count multiple mortgage credit checks inside a 45-day window as a single inquiry, so you can collect competing offers without stacking damage on your score.

What does it mean to refinance a home equity loan?

Refinancing a home equity loan means paying off your existing equity loan with a new loan secured by the same house, usually to lower the rate, change the term, or pull out more equity. The CFPB describes a home equity loan simply: it lets you borrow using the equity in your home as collateral, you get the funds as a lump sum, and the rate is typically fixed. It states the risk plainly too. If you can’t pay it back, the lender can foreclose.

That risk is why this decision deserves math instead of instinct: a lower payment stretched over a longer term can quietly cost more in total interest than the loan you’re replacing. Our breakdown of home equity loan pros and cons weighs both sides. Homeowners refinance an equity loan for one of four reasons:

• A lower rate: If rates have fallen since you closed, or your credit has improved into a better pricing tier, a new equity loan cuts the interest portion of every payment. Freddie Mac’s Primary Mortgage Market Survey is the standard public benchmark for where rates have gone.
• A different term: Stretching a 10-year balance over 15 years lowers the payment; compressing 15 into 10 raises it and cuts total interest.
• More equity: If your home has appreciated, a larger loan converts some of that paper gain into cash.
• One payment instead of two: Folding the equity loan into a cash-out refinance leaves you with a single loan, servicer and due date.

All four are legitimate. None is automatically worth 3% to 6% of the balance in costs. Start with our home equity hub if you’re still deciding whether to tap equity.

Your three refinancing options, compared

The three paths differ in lien position, rate structure, and what happens to your existing first mortgage, and that last one usually settles the argument. If you carry a low-rate first mortgage, a cash-out refinance replaces it at today’s pricing, which can wipe out the savings on the second lien.

A HELOC has two lives: during the draw period you borrow up to your limit repeatedly, and when it ends you enter a repayment period lenders typically set at 10 to 20 years, where the payment often jumps. Our guide to how a HELOC works covers that shock.

Why does a second-lien loan price differently from a first mortgage?

According to the CFPB explanation of second mortgages, a second mortgage or junior lien is a loan you take out using your house as collateral while another loan is still secured by it, and home equity loans and HELOCs are the common examples. The same page gives the reason for the price gap: if there is not enough equity to pay off both loans completely, the second lender may not get the full amount it is owed, so second mortgage loans often carry higher interest rates than first mortgage loans. That is the cost of leaving your first mortgage untouched, and it is why our guide to how second mortgages work starts with lien order.

Lien order also matters when you refinance the first mortgage and keep the equity loan. Per Fannie Mae Selling Guide topic B2-1.2-04 (Selling Guide published October 7, 2026), the lender must consider all subordinate liens secured by the property, regardless of who owes them, and if subordinate financing is left in place in a first mortgage refinance, Fannie Mae requires a resubordination agreement to be signed and recorded, unless state law lets the second lien keep its position.

Do you qualify to refinance a home equity loan?

Lenders in Align’s network generally want a credit score in the mid-to-high 600s, a debt-to-income ratio at or below 43% (some stretch to 50%), and a combined loan-to-value ratio no higher than 85% to 90%. Those are lender guidelines, not federal rules. The CFPB is explicit that different products and lenders set different DTI limits, which is why one denial isn’t a verdict.

• Credit score: Mid-to-high 600s is the common floor for a second-lien equity loan, and pricing improves in tiers above it. Raising your score before you apply is often worth more than a week of shopping.
• Debt-to-income ratio: Divide your total monthly debt payments by your gross monthly income. On $6,000 of gross income, a $1,500 mortgage plus $500 in other payments is 33%. The CFPB’s explainer on how lenders calculate your debt-to-income ratio uses that exact math.
• Combined loan-to-value: Add both balances and divide by the appraised value. On a $400,000 home with a $260,000 first mortgage and a $40,000 equity loan, that’s 75% CLTV. The appraisal drives this, not a listing site’s guess, and a low value can reprice or kill the loan.
• Seasoning, on the cash-out route only: Fannie Mae requires at least one borrower on title for six months before the new loan disburses, and Freddie Mac uses the same rule. Both also require a first mortgage being paid off to be at least 12 months old, note date to note date. A second-lien refinance isn’t subject to either rule.

If your first mortgage is FHA or VA, the seasoning rules differ again and should be checked against the current handbook, not a blog post. Our home equity loan tips cover what to tighten before you apply.

How much home equity do homeowners have, and how much is borrowed?

Sources: CFPB Issue Spotlight on home equity contracts; Federal Reserve Bank of New York Quarterly Report on Household Debt and Credit, 2026:Q2; FHFA House Price Index report, 2026Q2.

The New York Fed reported that the $13 billion rise in HELOC balances in the second quarter of 2026 marked the 17th consecutive quarterly increase, and that total HELOC limits rose by $19 billion, continuing an expansion that began in 2022, per its 2026:Q2 household debt report.

Rising values change your CLTV even if you never pay a dollar of principal. Hypothetical example, not an offer: take the $400,000 home with $300,000 owed on two loans from the qualifying section above. If its value rose 3.80%, matching the FHFA figure for Michigan in its 2026Q2 report, it would appraise near $415,200, and CLTV would fall from 75% to about 72%. Our guide to refinance appraisal requirements covers what the appraiser checks, and refinancing with a low appraisal covers what to do when the number comes in short.

How much does it cost to refinance a home equity loan?

Freddie Mac tells homeowners to expect 3% to 6% of the loan principal to refinance a mortgage, and names the line items that make up the bill: the lender’s origination fee, government recording costs, the appraisal, the credit report, title services, tax service and survey fees, attorney fees, and underwriting. Second-lien equity loans usually cost less to close, because the loan amount is smaller and several fees scale with it.

The formula that decides it is short: divide your total closing costs by your monthly payment savings, and the answer is how many months it takes to break even. If you’ll move before that month arrives, the refinance costs you money no matter how good the rate looks.

Say you owe $40,000 on a home equity loan and pay $520 a month. A better rate drops the payment to $440, saving $80 a month. At the 3% end, closing costs run $1,200 and you break even in 15 months. At the 6% end, costs run $2,400 and break-even is 30 months. Planning to sell in two years? The low-cost version works and the high-cost version doesn’t, same rate, opposite decision.¹ Our home equity loan tips cover which fees are worth negotiating.

Hypothetical example, not an offer. Actual rates, costs and payments vary.

Two rules make those numbers checkable. A home equity loan is closed-end credit, so every lender must hand you a Loan Estimate within three business days of application, itemizing the same categories in the same order, which makes comparing Loan Estimates side by side possible. A HELOC is open-end credit: you get the CFPB’s home equity brochure and account-opening disclosures instead, so you can’t compare it line for line. Ask for a written fee schedule.

What do HELOC disclosures show that a Loan Estimate does not?

If the HELOC path is on your list, the disclosures follow a different rule. Under Regulation Z’s home equity plan section, 12 CFR 1026.40, the early disclosures must include a historical example based on the most recent 15 years of index values and a statement of the maximum annual percentage rate that may be imposed under each payment option. If any disclosed term changes before the plan opens, other than a change from index movement, the lender must refund all fees you paid in connection with the application.

The CFPB booklet on home equity lines of credit (last updated August 2022) adds that a lender generally cannot charge a nonrefundable fee until three days after you receive the disclosures. Its worksheet for comparing three HELOC offers lists the rows worth asking about: the index used and its current value, the margin, how often the rate adjusts, the amount and length of any discount rate, the rate cap and floor, an early termination fee and an inactivity fee. The CFPB’s page on fees a lender can charge on a HELOC also lists a conversion fee for moving part of a balance to a fixed rate.

A HELOC can also be frozen. The same Regulation Z section lets a lender freeze or reduce a line when the home’s value declines significantly below the appraised value used for the plan, and the CFPB’s official interpretation says a decline that cuts the initial difference between the credit limit and the available equity by fifty percent is significant. Hypothetical example, not an offer: a home appraised at $400,000 with a $260,000 first mortgage has $140,000 of available equity. With an $80,000 line, the initial difference is $60,000. A value drop of $30,000, to $370,000, halves that difference, which meets the 12 CFR 1026.40 test for a significant decline, so the lender may stop new draws.

How the refinance process works, step by step

Expect a process that mirrors your original loan application, typically 30 to 45 days from application to funding.

1. Pull your numbers and estimate your CLTV

Get your equity loan payoff, your first mortgage balance, both rates and both terms in one place, then divide the combined balances by a conservative estimate of value. If that lands past the 85% to 90% band, the honest answer is to pay down principal or wait rather than buy an appraisal that confirms bad news.

2. Shop several lenders inside one window

Within a 45-day window, scoring models count multiple mortgage credit checks as a single inquiry, which is what makes comparison shopping close to free. As a broker, Align does this on one application instead of five, the point of shopping a refinance through a network.

3. Document and underwrite

Pay stubs, W-2s or tax returns, bank statements, homeowners insurance and your first mortgage statement. Keeping the first mortgage and replacing only the second? The new lender may need a subordination agreement so the liens stay in order, as refinancing a home with a second mortgage explains.

4. Close, then use your three-day window

Because this is a refinance or home equity loan on your principal residence rather than a purchase, federal law gives you three business days to cancel after closing. The clock starts only once all three things happen: you sign the note, you get your Truth in Lending disclosure, and you get two copies of the notice explaining the right to cancel. Saturdays count here; Sundays and federal holidays don’t. If those disclosures were never delivered or were wrong, the window can extend to three years. Nothing funds until it closes, so build the delay into your timeline.

Does refinancing change whether your interest is deductible?

It can, and the deciding factor is what you spent the money on, not what the loan is called. IRS Publication 936 is blunt: no matter when the debt was incurred, you can no longer deduct interest from a loan secured by your home to the extent the proceeds weren’t used to buy, build, or substantially improve that home. An equity loan spent on a kitchen remodel and one spent paying off credit cards are treated differently even if the paperwork is identical.²

Dollar limits stack on top of that test. For debt incurred after December 15, 2017, deductible home acquisition debt is capped at $750,000, or $375,000 if married filing separately; older debt keeps the $1 million and $500,000 limits. The IRS defines a substantial improvement as work that adds to your home’s value, prolongs its useful life, or adapts it to new uses. Read the IRS guidance on home equity interest deductibility before assuming a deduction, and take the question to your tax preparer.

Should you refinance a home equity loan to pay off credit cards?

Some homeowners add cash to this kind of refinance to pay off credit cards, and the CFPB is direct about it. Its page on consolidating credit card debt (modified September 2, 2026) says using a home equity loan to consolidate card debt is risky: if you don’t repay it, you could lose your home in foreclosure, closing costs can be hundreds or thousands of dollars, and a falling home value could leave you underwater. The same page notes that a balance transfer is another route, though its promotional rate runs for a set period and then ends.

Term length is the quieter cost. As the CFPB’s second mortgage explainer puts it, using home equity to pay off other debts is taking out one loan to repay another, and using a mortgage to pay off a five-year car loan may leave you making payments for ten, fifteen or even thirty years. The CFPB’s home equity loan page recommends talking with a qualified credit counselor before consolidating. The National Foundation for Credit Counseling, a nonprofit founded in 1951, reports more than 1,500 certified credit counselors in its network.

Samantha Shelton, Align’s broker owner, starts every equity conversation the same way: “Why. That’s my first question. What are we using the money for?” (Samantha Shelton, interview, September 13, 2026, Q90.)

When refinancing a home equity loan isn’t the right move

Sometimes the honest answer is to leave it alone. Four situations usually make refinancing a loser.

• You’ll move before break-even: If break-even is 30 months and you’re relocating in 18, the refinance is a fee paid for nothing.
• Your CLTV is above the cap: Past roughly 90%, most second-lien lenders stop, and no current conventional program rescues a high-CLTV equity loan the way crisis-era programs once did. Paying down principal or waiting for value to rise is the real path.
• You’d trade a low first mortgage rate for convenience: Consolidating into one cash-out refinance feels tidy, but if it reprices a first mortgage you locked years ago, run the blended cost over the full term. Total interest, not the monthly payment, tells the truth.
• You’re refinancing to survive the payment: If the problem is affordability rather than pricing, a loan modification, which changes your existing loan’s terms rather than replacing it, is a different remedy with different eligibility rules. Talk to a HUD-approved housing counselor before applying for new credit.

Consolidating consumer debt into a loan secured by your house also converts unsecured debt into debt your home guarantees. Our guide to using home equity wisely covers when that trade is worth making.

What is different about refinancing a home equity loan in Michigan?

• The Secondary Mortgage Loan Act: MCL 493.51 defines a secondary mortgage loan as a loan with a term of 90 days or more, made for personal, family or household purposes, secured by a mortgage on a dwelling that is already subject to one or more outstanding mortgages. Per the same section, a secondary mortgage loan is subject to the act if the property securing it is in Michigan.
• The Consumer Mortgage Protection Act: According to the Michigan Department of Insurance and Financial Services FAQ, the act as amended effective June 13, 2016 covers closed-end refinance transactions and subordinate lien mortgage transactions, among others.
• MSHDA down payment assistance: If you bought with MSHDA’s MI 10K DPA loan, a state program of up to $10,000, MSHDA’s MI 10K DPA page says repayment is deferred until certain events, including payoff of the first mortgage and the sale or refinance of the home. Plan for that balance before a cash-out refinance that pays off your first mortgage; our guide to the pros and cons of cash-out refinancing covers the rest of that trade.
• County recording: The new mortgage is recorded with your county register of deeds, and so is the discharge of the loan it replaces. Under MCL 600.2567, the fee for recording a document is $30, regardless of the number of pages, plus $3 for each additional instrument when one document discharges more than one. The government recording costs Freddie Mac lists in refinance closing costs include these.
• Renovation cash and contractors: If the refinance pays for work, Michigan’s LARA guidance for homeowners says contractors offering work totaling $600 or more in labor and materials must be licensed, and tells owners never to pay for the entire job in advance. Our guide to refinancing for home improvements covers the loan side.
• If you are denied or have a complaint: The DIFS Consumer Guide to Mortgage Rights in Michigan (revised June 2024) says the reason for a denial is identified in a Notice of Adverse Action, and that consumers can reach DIFS at (877) 999-6442, Monday through Friday, 8 a.m. to 5 p.m. Our guide to refinancing eligibility lists what lenders review before they decide.

FAQ: Refinancing a home equity loan

Here are answers to common questions about refinancing a home equity loan.

Can you refinance a home equity loan into your first mortgage?

Yes. A cash-out refinance pays off both your first mortgage and your home equity loan and replaces them with one new first-lien loan, leaving a single payment and often a lower blended rate. The trade-off: it resets your amortization and reprices a first mortgage you may have locked at better terms. Compare total interest, not just the rate, and see how cash-out refinancing works.

How much equity do I need to refinance a home equity loan?

Generally at least 10% to 15%, because lenders in our network cap combined loan-to-value at 85% to 90%. Add both loan balances, then divide by your home’s appraised value. If that lands above 90%, you’ll likely need to pay down principal or wait for values to rise first. Our home equity hub explains how to estimate your position.

Does refinancing a home equity loan hurt your credit score?

Only briefly, in most cases. The hard inquiry and the new account typically shave a few points, and closing the old loan shortens your average account age. Applying to several mortgage lenders inside a 45-day window counts as a single inquiry in the scoring models lenders use, so shopping doesn’t multiply the damage. On-time payments usually erase the dip within a few months, see our refinancing guide.

Is a HELOC better than refinancing a home equity loan?

It depends on how you spend. A HELOC gives revolving access during a draw period of roughly 10 years and charges interest only on what you draw, which suits staged costs like tuition or a phased renovation. A fixed-rate home equity loan gives one lump sum and a predictable payment. Rate structure is the real trade-off: HELOCs usually float, and a HELOC’s payment can jump when the draw period ends.

Can you refinance a home equity loan with the same lender?

Yes, and it changes your right to cancel. Under 12 CFR 1026.23(f)(2), a refinancing by the same creditor of a loan already secured by your principal dwelling is exempt from rescission, except to the extent the new amount financed exceeds the unpaid principal balance. In plain terms, you can cancel the new money within three business days, but not the replacement of the old balance. A new lender’s refinance carries the full right.

How soon can you refinance a home equity loan?

A second-lien refinance has no Fannie Mae or Freddie Mac waiting period. The cash-out route does: Fannie Mae’s Selling Guide B2-1.3-03 requires a borrower on title for six months and a first mortgage being paid off at least 12 months old. Either way, check your note: the CFPB says a prepayment penalty typically applies only to a payoff within a set number of years, usually three or five.

Will refinancing a home equity loan raise my Michigan property taxes?

No. Michigan’s General Property Tax Act, MCL 211.27a, excludes a transfer for security, or an assignment or discharge of a security interest, from a transfer of ownership, so a new mortgage or the payoff of an old one does not uncap taxable value. Michigan Treasury’s page on changes in ownership and uncapping explains the rule. Our guide to how property tax assessments work covers the rest.

Can you refinance a home equity loan on a rental or second home?

Often, with less room, as our guide to refinancing an investment property explains. Freddie Mac’s maximum LTV table caps a conforming cash-out refinance at 75% on a one-unit investment property or a second home, and 70% on a two- to four-unit investment property. The federal right to cancel in 12 CFR 1026.23 covers only a principal dwelling, and the CFPB HELOC booklet warns that renting your home may be prohibited under a line of credit’s terms.

Should you check your credit before refinancing a home equity loan?

Yes, a few weeks ahead. The CFPB says requesting your credit reports will not hurt your credit score, and USA.gov names AnnualCreditReport.com as the only site the federal government authorizes for free reports from Equifax, Experian and TransUnion. According to myFICO, amounts owed make up 30% of a FICO Score, so paying down card balances before you apply can help. See what counts as a good credit score and refinancing with a low credit score.

The bottom line on refinancing a home equity loan

Refinancing a home equity loan replaces your existing second lien with new terms, and you have three routes: a new home equity loan, a cash-out refinance that folds it into your first mortgage, or a HELOC. Lenders in our network typically cap combined loan-to-value at 85% to 90% on the second-lien route, while a conventional cash-out refinance stops at 80% LTV on a one-unit primary residence. Freddie Mac puts refinance costs at 3% to 6% of loan principal, so the deciding number is always the same: total costs divided by monthly savings equals the months you need to stay to come out ahead. If that month arrives after you plan to move, don’t refinance.

If you’re ready to see which of the three paths is actually cheapest on your numbers, talk to Align Lending. We’ll shop your scenario across our lender network and put the break-even math in front of you side by side. Call 248-506-5727 or start online.

Footnotes:

1. Example figures in this article are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms or a rate quote under federal or state lending laws. Your rate, payment, closing costs and break-even point will depend on your application, your property, your loan program and market conditions, and will be itemized on your Loan Estimate and Closing Disclosure. Return to text.

2. This is general information, not tax advice. Whether any mortgage or home equity interest is deductible depends on how the proceeds were used, the amount and date of the underlying debt, and whether you itemize. Consult a qualified tax professional about your situation. Return to text.

Sources: refinance costs of 3% to 6% of loan principal and the itemized list of refinance fees, Freddie Mac (My Home by Freddie Mac, “Understanding the costs of refinancing”). Weekly average mortgage rate benchmark, Freddie Mac Primary Mortgage Market Survey. Maximum 80% LTV for a cash-out refinance on a one-unit principal residence, Fannie Mae Eligibility Matrix (incorporated by reference into the Selling Guide). Cash-out refinance seasoning, at least one borrower on title for six months before disbursement, and a first mortgage being paid off at least 12 months old measured note date to note date, Fannie Mae Selling Guide B2-1.3-03 and Freddie Mac Single-Family Seller/Servicer Guide (cash-out refinance requirements). Home equity loan definition, lump-sum disbursement, typically fixed rate and foreclosure risk, Consumer Financial Protection Bureau. HELOC draw period of about 10 years, repayment period typically 10 to 20 years, variable rates, and lender fees including minimum-draw requirements, Consumer Financial Protection Bureau. Debt-to-income ratio calculation and the statement that different loan products and lenders set different DTI limits, Consumer Financial Protection Bureau. Loan Estimate delivery within three business days of application for closed-end credit, 12 CFR § 1026.19(e); home equity plan disclosures and brochure within three business days of application for open-end plans, 12 CFR § 1026.40. Right of rescission of three business days on a non-purchase mortgage secured by a principal residence, the three events that start the clock, Saturdays counting as business days, and the extension to three years when disclosures are missing or inaccurate, 12 CFR § 1026.23; Consumer Financial Protection Bureau. Multiple mortgage credit inquiries within a 45-day window counted as a single inquiry by newer scoring models (14 days on older models), myFICO credit education; Consumer Financial Protection Bureau. Disallowance of interest on loan proceeds not used to buy, build or substantially improve the home, the $750,000 / $375,000 and $1,000,000 / $500,000 acquisition debt limits, and the definition of a substantial improvement, IRS Publication 936. Credit score, debt-to-income and combined loan-to-value thresholds described as lender guidelines reflect underwriting standards observed across Align Lending’s wholesale lender network and are not government or GSE requirements.

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Loan program rules, underwriting guidelines, cost ranges and tax provisions change and vary by lender, property and borrower; confirm your figures with your Loan Estimate and Closing Disclosure and consult a qualified professional about your situation. Figures shown are illustrative, are not a rate quote or an offer of credit, and are subject to change. Align Lending is an independent Michigan mortgage broker, NMLS #2041154.

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