Interest rate cuts are finally on the table, a significant shift in the financial world. For homeowners with home equity loans, this presents a unique opportunity and a complex question. This article helps you decide whether to refinance your own loan.
High-interest rates have made borrowing a pretty expensive proposition. The Federal Reserve, trying to fight persistent inflation, kept the federal funds rate high. This affected rates on everything from credit cards to mortgages. But things are changing. The Fed is ready to cut rates for the first time since December. For you, the homeowner, this new climate means exploring whether your current home equity loan still serves you best.
Your Home's Equity Is a New Lending Option
A home equity line of credit, or HELOC, is a way to use your home’s value for a loan. Think of it like a credit card with a high limit. You can withdraw money as you need it, up to your credit limit. When you pay back the money, the credit line becomes available again.
A variable-rate HELOC means your interest rate changes over time, following the market. One month your payment could be lower, and the next it could be higher. It's unpredictable. A fixed-rate HELOC, however, gives you payment predictability and peace of mind. It stays the same throughout the loan's term. It is important to note that with a fixed-rate HELOC, the full loan amount is typically drawn at the time of origination. That stability is a good thing for many people, especially when the market is volatile.
High Rates Made You Smart To Borrow Home Equity
You might have a home equity loan from a time when rates were still high. Currently, the average rate for home equity loans ranges between 8.23% and 8.38%. Many homeowners tapped their home equity with these fixed-rate loans, which provide a single lump sum. They were a better option than the higher rates on other borrowing products. A fixed-rate home equity loan is great because it insulates your loan from any future rate increases. The rate you get is the rate you keep.
Separately, some homeowners may have chosen a fixed-rate HELOC, which also offers payment stability but functions as a line of credit that is fully drawn at closing.
But what about when rates start to fall? A fixed rate means you don't benefit from the rate cuts that are coming. This is the exact moment when you should consider a new option. Should you refinance your home equity loan to a loan with a lower rate? The answer depends on your situation. There are still risks and costs involved with refinancing.
You Should Refinance If Your Rate Is High
Experts say there are specific situations where refinancing your home equity loan now could save you a lot of money. If you have a home equity loan with a rate around 9% or higher, you are a great candidate for refinancing. You should definitely consider refinancing if the interest rate you can get on a new loan is at least a full percentage point lower than your current one. That difference can meaningfully reduce your monthly payments and the total interest you pay.
And don't forget to look at closing costs. You need to make sure the math works out in your favor. Compare the closing costs of the new loan against your potential savings. It all needs to make sense for you. Your new rate will depend on your credit score, loan amount, and other factors.
Size and Term Matter For Your Refinance
The size of your loan and the terms you want also play a big part in whether refinancing is a good idea for you. A lower interest rate has a bigger impact on a larger loan. For example, a half-point drop in a six-figure loan could save you thousands. The difference might be less for a smaller loan.
You can also use refinancing to change your loan terms. If you want lower monthly payments, you could refinance your ten-year loan to a fifteen-year loan. This would spread out your payments and reduce your monthly obligation. Conversely, you could shorten the loan term to pay it off faster and save on total interest.
Here's When Refinancing Doesn’t Make Sense
There are also times when refinancing your home equity loan is not the best move, even with the Fed’s new interest rate cuts. If your current interest rate is already low, you might want to reconsider. The closing costs associated with refinancing can negate any small savings you get from a tiny rate drop. You also need to think about your timeline. If you plan on selling your home in the near term, refinancing might not be worth it.
You might not break even on the refinancing costs before you sell the house. For instance, if it takes eighteen months to break even on the closing costs but you plan to sell in twelve, you are better off keeping the money you would have used for those costs. Lastly, if you are close to paying off your loan already, it's often best to just continue with your payments. Paying extra costs to refinance so late in the game doesn't make much sense.
A HELOC May Be Your Better Option
A home equity line of credit could be an excellent alternative to another home equity loan. A HELOC usually comes with a variable rate, which means if rates keep dropping, yours will probably go down too. You get more flexibility with a variable-rate loan. Regardless of your choice between refinancing to a home equity loan or opting for a HELOC, make sure you compare the costs and benefits first. Everyone has a different situation, so make sure whatever you choose fits your financial picture.
