Last updated: December 2025
Quick answer
Falling mortgage rates in 2025 and 2026 could prompt more homeowners to choose a home equity line of credit (HELOC) rather than refinancing. With high equity, lower borrowing costs, and no need to reset a first mortgage, HELOCs offer flexibility that aligns with current market conditions.
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Why mortgage rates affect HELOC demand
When mortgage rates fall, the typical assumption is that homeowners will rush to refinance. While this is true for some, the current lending environment tells a different story.
Most homeowners locked in historically low fixed rates between 2020 and 2022. Even if rates drop in 2025, refinancing into a higher mortgage rate may not make financial sense.
Instead, homeowners with strong equity positions are expected to turn to HELOCs as a smarter alternative. A HELOC allows you to borrow against your home’s value without touching your first mortgage.
This shift in borrower behavior could create a significant increase in HELOC activity through 2026.
Why homeowners may hold off on 2025 refinance
Even with mortgage rates falling, millions of homeowners are still holding onto rates under 4 percent from the 2020 and 2021 refinance boom. Refinancing in 2025 could mean replacing a sub-4 percent rate with something closer to 5.5 percent or higher.
This creates what economists call the mortgage lock-in effect. Homeowners are financially incentivized to keep their existing mortgage and avoid a rate reset to a higher rate. As a result, refinancing volumes are expected to remain low, even as rates decline.
Instead of giving up a favorable mortgage, homeowners can use a HELOC to:
- Fund home improvements or renovation projects
- Consolidate high-interest debt
- Pay for tuition or medical bills
- Access liquidity for significant expenses
A HELOC gives them access to cash without disturbing their current home loan.
Home equity borrowing strategy
As home prices have risen, so has homeowner equity. Many households now have hundreds of thousands of dollars in tappable equity, which refers to the amount of home value available for borrowing after accounting for the mortgage balance.
To calculate your tappable equity:
- Determine your home’s current market value
- Subtract your existing mortgage balance
- Multiply by your lender’s maximum loan-to-value ratio, often 85 percent
Example:
- Home value: $650,000
- Mortgage balance: $390,000
- Max LTV: 85 percent
- Tappable equity = ($650,000 × 0.85) – $390,000 = $162,500
This equity is available for use without selling the home or refinancing the first mortgage. Falling interest rates make borrowing from that equity more affordable.
Why HELOCs become more attractive when rates fall
Unlike mortgage rates, which are based on long-term bond yields, HELOC rates are based on the prime rate.
While mortgage rates respond to investor demand for mortgage-backed securities, HELOC rates move with the Federal Reserve’s short-term policy decisions.
When both rates fall together, as projected in 2025, homeowners get two key benefits:
- A stronger reason to access equity, since borrowing costs drop
- A lower monthly payment on existing HELOC balances
Here is a breakdown of how much a rate reduction can save:
| HELOC Balance | Rate: 9.5% | Rate: 8.0% | Monthly Interest Savings |
|---|---|---|---|
| $50,000 | $395.83 | $333.33 | $62.50 |
| $100,000 | $791.67 | $666.67 | $125.00 |
| $150,000 | $1,187.50 | $1,000.00 | $187.50 |
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Cash-out refinance vs HELOC: Why the HELOC wins in 2025
In the past, a cash-out refinance was the standard way to tap into home equity. But that model works best when you can lower your mortgage rate in the process.
With current conditions, a cash-out refinance would force many borrowers to:
- Give up a 3.25 percent mortgage
- Take on a 5.75 percent replacement loan
- Pay closing costs on the full loan amount
By contrast, a HELOC allows you to:
- Keep your original mortgage and rate intact
- Borrow only the amount you need
- Pay interest only on the balance used
- Benefit from lower upfront costs
Because of these advantages, many borrowers are expected to choose HELOCs over cash-out refinancing in the next housing cycle.
What to watch: The coming HELOC wave
Industry analysts are predicting a substantial HELOC wave in 2025 and 2026, fueled by three factors:
- Declining mortgage rates that do not beat existing fixed loans
- Growing tappable equity across U.S. housing markets
- Increasing consumer awareness of HELOC flexibility
Homeowners now view their home equity as a financial tool, not just a static asset. This behavioral shift is expected to push demand for equity-based credit products, especially those with digital applications and fast approvals.
Why HomeEQ is positioned to lead the HELOC surge
As the market shifts toward home equity borrowing, HomeEQ offers a borrower-first experience explicitly built for this moment. Unlike traditional banks, HomeEQ focuses exclusively on HELOCs and home equity products.
Here is how HomeEQ compares to typical lenders:
| Feature | HomeEQ | Traditional Lender |
|---|---|---|
| HELOC specialization | Exclusive | One of many products |
| Online application | Yes, in minutes | Often requires branch visit |
| Rate structure | Transparent, prime + margin | Varies widely |
| Fixed-rate option | Available | Not always available |
| Credit score flexibility | Accepts 640+ | Usually 680+ |
| Equity calculator tool | Built into platform | Not standard |
HomeEQ also makes it easy to explore what your monthly payment would be under different interest rate scenarios, helping you plan with confidence.
See if a HELOC fits your financial needs.
Frequently asked questions: Falling mortgage rates and HELOC
Q: Why would falling mortgage rates increase HELOC usage?
A: Because many homeowners already have low fixed mortgage rates, refinancing may not save money. A HELOC lets them tap equity without replacing their first mortgage.
Q: Is 2025 a good time to open a HELOC?
A: Yes, especially if rates continue to drop. You can access your home equity at a lower borrowing cost and avoid resetting your primary mortgage.
Q: Will HELOC rates fall if mortgage rates fall?
A: Not always, since HELOC rates are based on the prime rate. However, if the Federal Reserve cuts rates in 2025, HELOC rates will likely drop too.
Q: How do I know how much equity I can use?
A: Calculate tappable equity by subtracting your mortgage balance from 85 percent of your home’s current value. HomeEQ provides a free tool to help.
Q: Can I refinance later if HELOC rates rise again?
A: Yes. If market conditions change, you can refinance your HELOC, convert it to a fixed rate, or roll it into a future mortgage refinance.
