Will my home equity loan rate drop after rates are cut?

Borrowing from your home equity has been one of the most cost-effective ways to access extra cash in recent years. While credit card interest rates surged past 20% and personal loans rose to around 12% (on average), both home equity loan and home equity line of credit (HELOC) interest rates mostly remained in the single digits. And with home values seemingly on a continuous rise, the average homeowner has around $327,000 worth of equity right now. 

A lower interest rate and higher amounts of borrowing potential aren't the only benefits of a home equity loan now, however. With inflation dramatically cooling and interest rate cuts imminent when the Federal Reserve meets again later this September, home equity could become even more affordable than it already is. But if you already have a home equity loan will the rate just drop automatically — or will you need to take action to secure the lower rate? That's what we'll detail below.

See how low today's home equity loan rates are here now.

Will my home equity loan rate drop after rates are cut?

In short: No, your home equity loan interest rate won't automatically drop after interest rates are cut. That's because home equity loans have fixed interest rates which remain the same for the life of the loan. That's actually been a big selling point for this financial product in the increasing rate climate of recent years. As rates rose repeatedly in 2022 and 2023, home equity loans remained the same for borrowers. This allowed them to budget accurately and it allowed them to remain immune from an otherwise adverse rate climate. 

But with rates now on a downward trend and multiple cuts to the federal funds rate on tap for this year, home equity loan borrowers may be looking to reduce their payments via a lower rate. Fortunately, there are two ways they can do so:

• Refinance to a lower rate: If you like the structure and predictability of the fixed-rate home equity loan and simply want to pay less, then consider a traditional refinance from your current home equity loan rate to the prevailing, presumably lower one. You will need to pay home equity loan refinancing costs to secure a better rate (approximately 1% to 5% of the loan's value), but it could be worth it if it results in a significant reduction in your payments. Just be careful not to be too hasty. With multiple rate cuts on the horizon, you'll need to carefully consider the benefits of refinancing now versus what could be available soon.
• Refinance into a HELOC: Depending on the lender, you may also be able to refinance into a HELOC instead. HELOC interest rates are variable and subject to change as the rate climate does. So once refinanced into this product type, you won't need to worry about taking advantage of future rate cuts — your HELOC will adjust on its own (often monthly). Still, HELOC rates are averaging almost a full point higher than home equity loans right now (9.25% versus 8.49%). So you'll need to weigh that higher rate versus the HELOC's innate ability to adjust as rates improve.

Compare the best HELOC and home equity loan offers online.

The bottom line

Home equity loans have fixed rates, making them safe and reliable when interest rates are climbing but less beneficial when rates are falling again. But homeowners have options. They can keep the structure of their home equity loan and refinance to a new lower rate (for a price) or they can refinance into a HELOC, which has variable rates that will automatically decline as the overall rate environment does. Just don't sit idle. With lower interest rates soon available, home equity borrowers could see significant savings if they take certain steps now.