As homeowners look to tap into their accumulated home equity, options like home equity lines of credit (HELOCs), reverse mortgages, home equity loans, and mortgage refinancing can provide viable solutions. With the average home equity currently around $320,000, many homeowners have substantial equity they can access. But with interest rates fluctuating, especially heading into 2025, itâs important to consider which borrowing optionâhome equity loan or mortgage refinanceâmakes the most sense for your financial situation.
Hereâs a breakdown of when each option might be the better choice in the coming year.
When a Home Equity Loan is the Better Choice in 2025
For most homeowners, a home equity loan may be the ideal choice in 2025, primarily because it allows you to access additional funds without giving up your current low mortgage interest rate. As of now, home equity loan rates are typically around 8.38%, while mortgage refinance rates are averaging 6.80% for a 30-year loan. The key advantage of a home equity loan is that it functions separately from your primary mortgage. This means you donât have to refinance your entire mortgage or risk losing your existing low interest rate.
A home equity loan also offers flexibility. You can shop around for the best deal and choose from various lenders, not just your current mortgage provider. Plus, if you use the loan for home improvements or repairs, the interest may be tax-deductible, providing an added benefit for many homeowners.
Given these advantages, a home equity loan could be the best route for those who want to avoid altering their current mortgage terms while still unlocking the value in their home for things like renovations, debt consolidation, or other significant expenses.
When Mortgage Refinance Could Be the Better Option in 2025
While home equity loans are likely the better option for most, a mortgage refinance may make more sense for certain homeownersâparticularly those who purchased their homes recently, when mortgage rates were high. For example, if you bought a home in 2023 when mortgage rates hovered around 8%, refinancing could be a great way to reduce your monthly payments and free up cash.
Refinancing into a lower rateâcurrently averaging 6.80% for a 30-year mortgage and 6.15% for a 15-year mortgageâcould lead to significant savings. Conventional wisdom suggests refinancing is worthwhile if you can lower your rate by at least 1%. So, if your current rate is between 7.15% and 7.80%, refinancing could result in notable long-term savings.
Additionally, refinancing means you donât have to take on an extra loan, as with a home equity loan. With a mortgage refinance, youâre essentially replacing your existing mortgage with a new one at a lower rate, which could help you save on interest payments over time.
However, refinancing is not for everyone. Itâs best suited for those with higher interest rates who can benefit from lower payments. Homeowners who are already enjoying a low mortgage rate may find refinancing unnecessary.
The Bottom Line
When deciding whether a home equity loan or mortgage refinance is the better choice in 2025, your individual financial needs and goals are key. For most homeowners, a home equity loan will provide a cost-effective way to access additional funds without sacrificing a low mortgage interest rate. On the other hand, those with higher mortgage ratesâespecially those who bought homes in 2023 or laterâmay benefit from refinancing into todayâs lower rates.
To make the best decision, carefully evaluate both options, taking into account your current mortgage rate, financial goals, and how each option fits into your long-term plans. With the right approach, you can make the most of your home equity, whether through a home equity loan or refinancing.