When it comes time to refinance your loan, the equity in your property can be an added bonus. You can use the money from a home equity loan for a variety of things, such as debt consolidation or home improvements. As long as you have enough value in your property and you meet the debt-to-income guidelines, you can apply for both simultaneously.
Finding the Right Lender
Don't feel beholden to a single lender. If you find a lender that offers a great mortgage refinance rate, but you know there are banks with better terms on home equity loans, go for the best deal. Fill out your refinance application with the lender of your choice, just as you would if you weren't applying for a home equity loan. When you apply for the equity loan, complete the application, but indicate that you will have a first mortgage in X amount of dollars in front of the equity. Of course, if you can find a lender that has great terms for both a mortgage and an equity loan, you can simply send all of your information to one place.
Read More: Debt Lender vs. Equity Investor
On both the mortgage and home equity loan, the lender verifies your debt-to-income ratio. For the refinance, no more than 28 percent of your income can go toward your mortgage payment with taxes and insurance. No more than 36 percent can be allotted to your overall debt. Since this will be your first lien, the refinance lender won't take the equity loan into account. On the equity loan, your debt-to-income ratio can be a maximum of 40 percent, including your refinance payment, the equity payment and any other outstanding loans, car payments or credit cards.
When applying for a refinance and home equity loan simultaneously, especially at different lenders, the appraisal can be a problem. Your total loan-to-value ratio, including both the refinance and home equity, can't exceed 80 percent. If you apply for both loans at the same lender, it will use one appraisal. However, if you apply at different lenders, you can end up with two appraisals at two different values -- not to mention that you will end up paying for both appraisals as well. Ideally, see if the lender on the equity loan will accept the appraisal for the refinance, since it is a current, independently prepared report. The equity lender may charge a nominal appraisal review fee, but at least you know you have a consistent value.
The timing of closing is important when applying for two loans simultaneously. Liens on your property are based on priority, meaning the lender whose lien is recorded first has first rights to your property if you don't pay as agreed. The refinance lender expects to be your first lien while the equity lender understands that it will be the second. When you get your approval, schedule your refinance closing first, with the equity loan about a week later. This can vary depending on your availability as well as the lender's. If you get both loans with the same lender, the timing doesn't matter: the lender will make sure the liens are recorded properly.
- Bankrate: Refinance Vs. Home Equity Loan
- PNC Bank: Home Equity Loan Refinance
- The Federal Reserve Board: A Consumer's Guide to Refinancing
- PHH Mortgage. "Borrowing Basics: Home Equity Loans vs. Cash Out Refinancing." Accessed Dec. 17, 2019.
- Consumer Financial Protection Bureau. "What Is a Second Mortgage Loan or 'Junior-Lien'?" Accessed Dec. 17, 2019.
- Washington State Department of Financial Institutions. "Mortgage Refinancing Basics." Accessed Dec. 17, 2019.
- Discover. "Refinance 101." Accessed Dec. 17, 2019.
- FDIC. "State Housing Finance Agencies: First-Lien Mortgage Products." Accessed Dec. 2019.
- Citi. "The Refinance Application Process." Accessed Dec. 17, 2019.
- Discover. "Steps in the Home Equity Loan Application Process." Accessed Dec. 17, 2019.
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.