Should you refinance your home equity loan now that rates are cut? Experts weigh in
In the post-pandemic era, home equity loan rates and home equity line of credit (HELOC) rates rose as the Federal Reserve increased the benchmark interest rate. While the cost of home equity loans and HELOCs remained affordable compared with credit cards and personal loans, rates were far higher than they've been in recent decades.
Now, however, the Fed has shifted its policies, cutting rates 50 basis points at its September meeting and signaling further rates are coming. Both HELOC rates and home equity loan rates have begun to decline, prompting renewed interest in new loans and leaving many borrowers wondering if it's a good time to refinance their existing home equity debt.
If you're on the fence about whether to move forward with refinancing, it helps to know what experts have to say on the issue.
See how low today's home equity loan interest rates are here.
Should you refinance your home equity loan now that rates are cut?
The decision to refinance your home equity loan now depends on a few important factors. Here's when it makes sense (and when it doesn't):
Why you should refinance your home equity loan now
Refinancing involves getting a new home equity loan to repay your existing debt. Whether this makes sense or not depends on when you first took out your loan and what rate you're currently paying.
"If we're talking about a home equity loan with a fixed rate, then depending on when it was taken out, today's rate may be the same or slightly higher," said Neil Christiansen, a Colorado-based Home Loan Specialist for Churchill Mortgage.
For some who borrowed when rates peaked, however, opportunities to cut borrowing costs may be available and worth taking advantage of. "If you are refinancing to a lower rate than you currently have, it could be a perfect time," according to Domenick D'Andrea, AIF, CRC, CPFA, and co-founder of DanDarah Wealth Management.
Although D'Andrea pointed out that rates could continue dropping as the Fed moves forward with additional rate cuts this year and next, the reality is you could spend a substantial extra amount on your loan payments if you wait for months to refinance when you could capture some savings right now. Delaying may not always make sense in this situation.
Your initial reasons for taking out the home equity loan could also impact whether you should move forward now. "If your home equity line was used to create value through renovation work on your property, refinancing in the coming months or year makes a lot of sense," explained Jess Schulman, President and COO at Bluebird Lending.
Schulman said rate cuts will likely lead to increased competition in the housing market, which will drive prices up and positively impact the rate you're offered on a refinance loan. "Using those higher-valued comps in your appraisal coupled with the renovation work completed could create lower leverage on your loan, making the rate even better in today's market."
There's also another factor to consider if you have a HELOC, rather than a home equity loan that provided a lump sum upfront. "If a HELOC was taken out several years ago, it might make sense to reset the high credit limit using the new appraised value, ultimately giving access to additional funds. "Under those circumstances, refinancing a HELOC would make sense," Christiansen said.
Learn more about your best home equity refinancing options here.
Why you shouldn't refinance your home equity loan now
Although refinancing can make sense if you can drop your rate, the big question is how much you can save and whether you could increase your savings if you delay.
The reality is that there are costs associated with refinancing a home equity loan, and paying them makes sense only if you can realize considerable savings.
"You'd need to calculate to make sure it's sensible to pay the costs of the new loan. If the recoup time is greater than three to five years, it would make more sense to stay put and consider reinvesting the money you would have spent on the costs of the refinance somewhere that could offer a better return.," Christiansen said.
The likelihood of future rate cuts also means that delaying could pay off.
"If you have a home equity loan with a fixed rate that you obtained in the past year or so, you are likely at a high rate. Now that the Fed has started to cut rates, you may want to get ready to refinance the loan - but not right now," advised Melissa Cohn, Regional Vice President at William Raveis Mortgage. "With the expectation that the Fed will cut rates again this year and have a number of rate cuts in 2025, you may want to wait for rates to go lower before you pull the trigger." Cohn explained that with the high costs of refinancing, it doesn't make sense to do it repeatedly so you should hold off for those later rate drops before you lock in.
The bottom line
Ultimately, only you can decide if it makes sense to move forward now or delay. If you can reduce your rate and get some financial relief now, you may want to cut your costs sooner rather than later. But, if you can hold off for a bit, this could pay off if the Fed follows through with its planned rate reductions in 2024 and 2025.
