Have rates gone down since you got your home equity loan? Do you have another project in the works, and need more money to complete it? Or maybe your expenses have grown and you’re exploring ways to give your budget some breathing room. Coming out of a period of historically high interest rates, it’s understandable that you might wonder if it’s worth it to refinance.
According to a 2025 report from the Mortgage Bankers Association, home equity loans and HELOCs were up over 7% in 2024, with many borrowers using them to renovate homes (46%) or consolidate debt (39%).
“The most common situations I see are folks who tapped equity for major home renovations, unexpected medical expenses, or high-interest debt consolidation and are now feeling the weight of those monthly payments,” says Chris Kuclo, head of agent relations at Best Interest Financial. “I also hear from clients who were counting on rates dropping faster than they have and want to lock in today's improved (though not historically cheap) rates before any economic uncertainty reverses the trend.”
But how do you know if refinancing is the right move for you? This guide will walk you through the math.
Why refinance a home equity loan?
When you refinance a home equity loan, you’re replacing it with a new loan at the current (and hopefully better) interest rate — thereby lowering your monthly payment. However, the decision on whether to refinance is a bit more complex.
Jeb Smith, a mortgage broker in Huntington Beach, CA, suggests that you should only refinance “. . . when it solves a problem. Meaningfully lowering the rate. Converting from variable to fixed for stability. Improving monthly cash flow. Reducing risk. I don’t recommend refinancing just because rates moved a little bit. The better question is whether it improves your overall financial position.”
Here are some scenarios where refinancing a home equity loan may make sense.
Rates have dropped by 1% or more
One of the most common reasons that homeowners refinance their home equity loan is because interest rates have dropped.
Brett Rasmussen, owner of Omaha-based firm Mortgage Specialists, says that refinancing a home equity loan depends on a lot of variables, including “the value of the property, how much is owed, credit rating,” and other factors. But in general, he advises that you probably shouldn’t look into a refinance until “you see about a 1% drop in rates.”
Refinancing into a lower rate means that your monthly payment will be lower. For example, if you took out a 15-year home equity loan in May 2024, you probably got an interest rate around 8.8%. As of February 2026, the average rate on that same loan has fallen to 8.07%.[1] That’s almost a full percentage point.
Let’s say you have a house worth $400,000, and an outstanding mortgage balance of $300,000. Assuming you have excellent credit, taking out a $20,000 home equity loan with a 10-year term, at 8.8%, would translate to a monthly payment of just over $251. Refinancing that loan to the lower rate of 8.07% would get you a slightly lower monthly payment of $243, or slightly lower because you’ve been paying down the principal.
But refinancing would mean taking out a whole new loan, and paying the associated closing costs of 2-5%. Once you take that into account, the savings (less than $10 a month) probably aren't worth it.
“We see lots of lenders sell low rates,” Rasmussen says. “But borrowers don’t [always] review the fees. And many times it doesn’t make sense.”
You’ll stay long enough to break even
Another important factor is how long you plan on staying in the home. If you’re going to move in the near future, your total savings on a refinance probably won’t exceed the amount you’ll pay in closing costs.
“You have to calculate your break-even point,” says Smith. “Divide the total closing costs by your expected monthly savings. If you’re going to stay in the home long enough to exceed that break-even period, it may make sense. If not, you’re likely just moving debt around without real benefit.”
Refinance closing costs typically total 2-5% of the loan amount.[2] However, some lenders might allow you to forgo upfront closing costs at the expense of a higher rate or loan balance.
Let's walk through the math with an example.
Total upfront losing costs / monthly savings = break-even point in months
Say you have a 20-year, $60,000 home equity loan at 9.25%, and you can refinance to 7.75%. Your monthly payment goes from $550 to $493, bringing you $57 in monthly savings. If closing costs are 3% of the loan total, or $1,800, then you’d break even in about 32 months. If you’re planning to sell within the next couple of years, it probably doesn’t make sense to refinance.
When you’re thinking about how much home equity to access, it can also be helpful to look at trends in home prices. The latest report from the Federal Housing Finance Agency, for example, shows that while home prices are up year-over-year nationally around 2%, there are markets that saw big gains, markets that saw zero gains, and markets that saw a decline in prices. If you’re in a cooling market, be cautious when it comes to leveraging your home equity.
You need monthly payment relief
If cash is really tight, there’s a way to lower your monthly payment even if interest rates haven’t dropped. Refinancing your home equity loan into a longer term can lower your monthly payment since you’re spreading your balance over a longer period of time.
A $20,000 home equity loan at a rate of 8.07%, over a five-year term, translates to a monthly payment of $406. Refinanced to a ten-year term, that monthly payment goes down to around $243. Refinanced to a twenty-year term, the payment is only around $168.
At longer terms, you’ll end up paying more in total interest, but in the short term they can unlock immediate month-to-month financial relief.
Other reasons to refinance your home equity loan
Beyond the scenarios above, a few other circumstances can make a home equity loan refinance worth exploring:
- The draw period on a HELOC is ending: If you took out a HELOC and were only paying toward interest during the draw period, you might be shocked by higher payments once the draw period ends. If those higher principal and interest payments are too steep to manage, you might explore a refinance.
- Your home value has increased: The housing market may have changed for the better since you took out your initial home equity loan. If that’s the case and you need access to more cash for another renovation or an emergency, you can tap your equity again.
- You want more predictable payments: The variable rates on HELOCs can be stressful to deal with, particularly if they start rising. Switching to a fixed-rate HELOAN with a stable monthly payment can bring you peace of mind.
- A life event requires your to restructure your loan: Sometimes, life happens. “Job changes, divorce settlements, or an estate situation where a second lien needs restructuring are also real triggers that don't always get talked about enough,” says Kuclo.
LEARN MORE: How Much Does it Cost to Refinance?
Risks of refinancing a home equity loan
While refinancing can be a smart way to modify your loan terms, save money, or consolidate debt, it’s not without its risks. Here are some cons to consider before refinancing:
- The repayment term resets: Your rate isn’t the only thing that changes when you refinance. The repayment term resets as well, effectively extending your debt. For example, if you were 10 years into paying off a 20-year HELOAN and you got a new identical loan, you’d now have another 20 years to pay down your debt, not the remaining 10 years on the initial loan.
- Closing costs eat some of the upfront savings: “Closing costs are real, and a refi that saves you $60 a month but costs $3,000 upfront takes four or five years to break even — if you sell or refi again before that, you've actually lost ground,” says Kuclo.
- Risk of foreclosure: Your home serves as the collateral on a refinance. Missing monthly payments and defaulting on your loan puts you at risk of foreclosure and losing your home.
“The biggest risk I see is people treating their home equity like a revolving door — refinancing repeatedly without a payoff strategy means you're constantly resetting your amortization clock and slowly eroding equity you've worked years to build,” says Kuclo.
READ MORE: Is a Home Equity Loan a Good Idea?
Three ways to refinance a home equity loan
You have three options for refinancing a home equity loan, which include getting a new home equity loan, opening a HELOC, or doing a cash-out refinance on your first mortgage.
| Option | Pros | Cons |
|---|---|---|
| Refinance home equity loan | Can access a lower rate and lower monthly payment Fairly simple (same process as before) | Closing costs and fees can wipe out small savings |
| Convert to HELOC | Variable rate means your rate will fall as interest rates (presumably) decline You will have access to a line of credit, but you aren’t obligated to use it During the draw period, you may not have to make any monthly payments | If interest rates go up again, your variable rate will follow Once draw period is over, you’ll have to make payments on both interest and principal |
| Cash-out refinance | Consolidate all your home debt into one loan Can get you a better rate on both your primary mortgage and your home equity loan | If you have a low interest rate on your primary mortgage, it doesn’t make sense to refinance into a higher rate |
So which option should you choose? That depends on where you think interest rates are going, where you think your cash flow is going in the next 1-5 years, and what kind of interest rate you’re paying right now on your home equity loan and your primary mortgage.
Here’s what each option entails and who they might be best for.
1. Replace your current home equity loan with a new one
Like refinancing a primary mortgage, this option replaces your existing home equity loan with a new one at a new rate and potentially different repayment terms. The new loan pays off your original balance, and going forward you'll make payments on the new home equity loan alongside your primary mortgage.
This works well if you took out a home equity loan when rates were higher and can now lock in a lower rate — or if you need to tap additional equity for a renovation or other major expense.
"If you have run up a balance on your home equity loan and you find a HELOAN that could pay it off at a lower and fixed rate, that could make sense depending on the rate difference or just the security of a fixed rate," says Alex Olivera, broker and owner of Patriot Mortgage Group in Franklin, TN.
That said, this path may not be the right fit if current HELOAN rates are higher than what you have now, or if you're managing a phased project where costs are uncertain and you'll need to draw funds over time.
2. Convert to a HELOC
Converting from a home equity loan to a HELOC means opening a revolving line of credit secured by your home. The line pays off your existing home equity loan, and you can draw additional funds as needed during the draw period, up to your borrowing limit.
This is a good fit for phased expenses — a multi-stage renovation or college tuition payments, for example — where you need flexibility rather than a lump sum. The tradeoff: HELOCs typically carry a variable rate, so payments can rise if rates climb.
Some lenders offer a feature called a "fixed-rate advance" or "HELOC lock" that lets you lock all or part of your balance at a fixed rate.[3][4] There's usually a minimum draw required to activate the lock, and a cap on how many locked balances you can carry at once — but it can add meaningful predictability to an otherwise variable product.
"It's ideal when you know you have a defined, large draw on the horizon — a final contractor payment, for example — and you want to insulate that amount from future rate movement while keeping the rest of your line flexible and variable," says Kuclo.
TIP: You can also refinance a HELOC by opening a new one. Doing so pays off the initial line of credit, resets the draw period, and delays repayment.[5]
3. Cash-out refinance
A cash-out refinance replaces your primary mortgage with a larger loan, and you receive the difference in cash. You can use those funds to pay off your home equity loan — eliminating your second mortgage entirely — with any remainder going toward other goals.
This is the only option of the three that touches your primary mortgage rate. If you're currently holding a 3–4% rate, trading it away is likely a costly mistake.
"A cash-out refi makes sense when your first mortgage rate is already in today's ballpark and rolling everything into one payment creates real savings, but if you're sitting on a sub-4% first mortgage (and plenty of people still are), blending that rate with today's environment via a cash-out refi is almost always a mistake — you'd be permanently giving up something that cannot be replaced," says Kuclo.
How to qualify for a home equity loan refinance
You’ll need a strong financial profile and enough equity to qualify for a home equity loan refinance. Here are the four standard criteria lenders look for when assessing refinance applications:[6][7]
- Home equity: Most lenders require you to maintain a minimum of 15-20% equity in your home after you tap it for funds. So if you only have 10% equity, you likely won’t qualify with most lenders.
- Credit score: While you might be able to find a home equity refinance with a credit score as low as 620, many lenders set stricter criteria for home equity products. You may need a score closer to 680-720 to qualify for the best rates and terms.
- DTI ratio: This ratio — called the debt-to-income ratio — compares your total monthly debt obligations against your monthly gross income. Lenders typically don’t want this value to exceed 43%. If it does, your finances are likely stretched too thin already and taking on more debt could be too risky.
- Payment history: Lenders also like to see that you’ve kept a steady history of on-time, in-full payments on your existing loans. This is another way that lenders perform risk assessment on borrowers.
Tips for refinancing a home equity loan
“The single most important thing is: don't refinance in a vacuum,” says Kuclo. “Pull the full picture — your first mortgage, your second lien, your realistic timeline in the home, and your broader financial goals — and make sure the numbers tell a coherent story before you sign.”
Here are other tips to keep in mind when thinking about a home equity loan refinance:
- Check for a prepayment penalty: Before calculating your break-even point, check if your current loan includes a prepayment penalty. If it does, add that fee to your total closing costs so it’s factored into your break even calculation.
- Shop multiple lenders: Don’t just stick with your current lender for a refinance. Often times, smaller credit unions offer lower rates than larger national banks. “Shop at least two or three lenders, because home equity loan pricing varies more than most people realize; a half-point rate difference on a $100,000 loan is real money over a decade and a half,” says Kuclo. You might also consider working with a mortgage broker who can shop around with different lenders on your behalf.
- Ask about no-closing-cost options: Instead of paying closing costs upfront, some lenders allow you to roll the closing costs into the new loan balance or to take a slightly higher interest rate.
- Avoid rushing into a refinance for the sake of a rate: Especially in a volatile rate environment, it can be easy to feel pressured to jump on a refinance when rates drop before taking time to figure out whether it makes sense. But Kuclo advises against that. “...Don't let a fear of ‘missing the rate window’ push you into a decision that doesn't pencil out — I've been doing this for over 15 years, and the best deals are always the ones made with clear eyes,” says Kuclo.
» ESTIMATE YOUR LOAN: Use our home equity loan calculator to see how much you could access.
What are the alternatives to refinancing a home equity loan?
If you’ve run the math and it doesn’t make sense to refinance your home equity loan — or you don’t meet lender criteria to refinance — there are some alternatives you can explore next:
- Loan modification: If you were hoping to refinance to get lower monthly payments on your home equity loan but don’t qualify, you can pursue a loss mitigation option known as a loan modification. A loan modification lets you change the repayment term, rate, or balance on your loan without refinancing — but you must provide proof of financial hardship to qualify and receive lender approval.[8][9]
- Loan forbearance: Seeking loan forbearance is another way to prevent foreclosure if you’re struggling to make monthly payments. With forbearance, your lender agrees to pause payments on your loan for a specified number of months. But once the forbearance period ends, you’ll need to repay those paused payments. Like with a modification, you’ll need to provide proof of financial hardship and get approved for loan forbearance.[10] This might be a good option if keeping up with payments is only expected to be a short-term issue.
- Personal loan: Because many HELOCs come with a minimum draw amount, you might opt for a personal loan if you need a small balance. Many lenders typically don’t allow for HELOC draws below $50,000, according to Taylor Lacy, loan officer at Edge Home Finance in Minnetonka, MN. But keep in mind that personal loans tend to have higher interest rates than those on home equity products.
- Home equity sharing agreement: This type of agreement might be an option if you’re struggling to qualify for a home equity loan refinance. A home equity sharing agreement allows you to receive a lump sum payment from an investor company in exchange for a portion of your home’s future equity. While you don’t need to make monthly payments with this agreement, you’ll need to repay the full amount you owe when the agreement’s term ends.[11]
Connect with a loan officer to make a plan
Whether you’re thinking of refinancing your home equity loan today or simply looking at future possibilities, talking to a loan officer now can help. An experienced loan officer can look at your current financial profile and advise you on your loan options.
At Best Interest Financial, we provide personalized, white-glove service that big-box and automated lenders can’t. With over 80 years of combined experience and billions in closed loans, our loan officers have the expertise to help identify creative financing possibilities that others miss.
No matter where you're starting from, we can help you think through a strategy to reach your goals. Get a free, 60-second quote from Best Interest today to learn more.
FAQ
What is the 2% rule for refinancing?
The 2% rule for refinancing means it often makes sense to refinance if you can get a new rate 2.00 percentage points lower than your current rate. But that advice is generally outdated. Today, the magic mark for refinancing is more around a 1.00 percentage point rate difference. Depending on your loan, you could see meaningful savings with a rate difference of only 0.50-0.75 percentage points.
Can you lock in a fixed rate on a HELOC without doing a full refinance?
In some cases, yes. Locking in a fixed rate on a HELOC depends on if your lender offers this option. Many lenders allow homeowners to lock in a fixed rate on some or all of the money drawn from a HELOC. Keep in mind that the lender may set a draw minimum to use this perk, and you can only use it during the draw period.
Is it better to refinance your home or do a home equity loan?
A cash-out refinance can make sense if you're not losing a 3-4% mortgage rate to do it. If you want to preserve the rate and terms on your primary mortgage, taking out a home equity loan can be the better option.
What disqualifies you from refinancing?
You might not be able to get a refinance if you don’t meet a lender’s eligibility criteria. For example, not having enough equity, a high enough credit score, or enough room in your budget to take on more debt could all be reasons why a lender might reject your application.
Can you use a home equity loan to pay off your existing mortgage?
You can, but whether or not that’s a smart tactic for paying off your first mortgage depends on if you can get a home equity loan or HELOC at a lower rate. If you have a low mortgage rate from around 2022, it likely won’t make sense to take on a loan with a higher rate just to pay off your mortgage. What’s more, a HELOC comes with the added risk of a variable rate.[12]