Why you should avoid refinancing if borrowing home equity now

In the interest rate environment of 2020 and 2021, cash-out refinancing or a traditional refinance made a lot of sense for homeowners in need of extra funding. The latter allowed them to obtain that financing by paying a much lower mortgage rate than they had previously been locked into. The former option, meanwhile, meant starting anew with a loan bigger than the existing mortgage balance, which homeowners then kept the difference between as cash for their needs and expenses.

But the economic landscape of early 2026 is markedly different. Inflation, considerably lower than it was in recent years, remains sticky and problematic. And interest rates, following a series of Fed rate cuts, were frozen this week by the central bank. With no meeting even on the calendar until March, imminent relief looks unlikely. In this climate, then, it may actually be better if homeowners avoid their traditional refinance options and instead look to alternatives. Below, we'll explain why (and what borrowers should do specifically instead).

Start by seeing how much home equity you could borrow with a home equity loan here.

Why you should avoid refinancing if borrowing home equity now

With home equity levels hitting a record high in 2025, borrowing from this source could be advantageous in 2026. But doing so via a refinance isn't likely the best move. Here's why:

It could mean giving up an ultra-low mortgage interest rate

If you refinanced in 2020, as mentioned above, you may have a rate comfortably under 4% now and maybe even under 3%. But a cash-out refinance would mean giving up that rate in exchange for one in the 5.50% to 6.50% range now, depending on the term in question. 

Paying potentially double the interest could easily negate any financial boost you get from the equity that's offered via the cash-out refinance exchange. Be careful, then, if you've initially decided on this option and don't sign any application without first comparing it to your other home equity borrowing options now.

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You have multiple other options in which you can keep your mortgage rate

Home equity loans allow you to borrow a lump sum of your home equity without having to refinance and give up your existing mortgage rate. And, right now, home equity loans have some of the lowest interest rates in the entire borrowing space. Home equity lines of credit (HELOCs), meanwhile, work similarly and also will keep your current mortgage terms intact. And HELOCs have variable rates that change each month, which can be a major advantage in today's cooling interest rate environment. 

Even reverse mortgages, which are reserved for seniors, could be worth exploring if you know you want to borrow equity but still want to protect your original mortgage terms. Consider all three, then, before naturally assuming a refinance is the best option now.

The long-term interest rate forecast is unclear

Even with home equity loans and HELOCs as alternatives, some homeowners may still want to refinance anyway, assuming that the higher rate they'd secure now could always be refinanced back down to what it was. But that's a risky assumption. 

Remember, rates at the start of the decade were near historic lows and are unlikely to reappear anytime soon, if at all. And, right now, the mortgage rates listed online are about in line with historic averages. Refinancing out of a rate under 3%, then, on the assumption that it will be obtainable again in the future, could be a costly mistake easily avoided with alternative sources.

The bottom line

With the average homeowner sitting on a six-figure amount of equity now, borrowing from it is naturally appealing. But the way that exchange takes place is critical to get right. In other times, a refinance or cash-out refinance may have been the best approach, but that's arguably not the case right now. Fortunately, home equity loans and HELOCs offer cost-effective alternatives that won't impact your existing mortgage terms. Evaluate all of your options closely before getting started, and remember to only borrow an amount you can comfortably afford to repay, as both home equity loans and HELOCs use your home as collateral.