Is Now the Right Time to Refinance Your Home Equity Loan?
When most homeowners hear the word “refinance,” they immediately think of their primary mortgage. But a home equity loan, often referred to as a “second mortgage,” can be refinanced too — and for some, it may be the smartest financial move available right now.
Rates for home equity loans dipped to their lowest point in over a year this past spring before ticking up slightly, and forecasts suggest they may trend closer to 8 percent by the end of 2025. That’s a far cry from where they stood a year ago. For borrowers currently paying rates well above today’s averages, refinancing could translate into meaningful monthly savings or better terms.
At its core, refinancing a home equity loan simply means replacing your existing loan with a new one. Homeowners pursue this for different reasons: lowering their interest rate, reducing monthly payments, switching from a variable rate to a fixed one, or even tapping into additional equity for renovations or other major expenses. For example, a borrower who locked in a 10 percent rate several years ago might now qualify for a new loan at 8.25 percent, saving thousands of dollars in interest over time.
Eligibility, of course, depends on a combination of factors. Lenders typically require at least 15 percent equity left in the home after accounting for both the primary mortgage and the home equity loan. Credit scores matter too: while some lenders may approve borrowers with scores in the mid-600s, a score above 700 often unlocks the best rates. Debt-to-income ratios are also closely scrutinized, with 43 percent usually being the upper limit. A solid record of on-time payments on your current loan can help offset weaker numbers elsewhere in your financial profile.
The benefits of refinancing can be compelling. Lowering the rate by even a percentage point can cut monthly payments, and choosing a longer repayment term can ease short-term financial strain. On the other hand, a shorter loan term may raise the monthly bill but allow you to pay off the debt faster and save on interest. Many borrowers also use refinancing as an opportunity to consolidate debt or secure funds for big-ticket home improvements.
There are trade-offs to consider. Refinancing resets the repayment clock, which could leave you paying more in total interest over the life of the loan. Prepayment penalties on your existing loan may apply, and if property values in your area have fallen, you might not have enough equity to qualify. There is also the risk that stretching out repayment leaves you carrying debt longer than you intended.
For homeowners juggling both a primary mortgage and a home equity loan, refinancing them together through a cash-out mortgage refinance may be another option. This consolidates the debt into one monthly payment and can provide additional funds if needed. Still, it comes with its own risks: potentially higher interest rates and the complexity of taking out a brand-new primary mortgage.
For those who don’t qualify for a refinance, alternatives exist. Home equity sharing agreements, reverse mortgages for seniors, or even unsecured personal loans can provide access to cash. In some cases, lenders may also offer loan modifications or temporary forbearance to help borrowers through financial rough patches.
Ultimately, refinancing a home equity loan makes the most sense when current rates are at least a point lower than what you’re paying, when you plan to stay in your home long enough to recoup any upfront costs, and when your financial situation has improved since the original loan. With home values still elevated and rates expected to soften, many homeowners may find that this fall presents a window of opportunity worth exploring.