Recently, home equity loans have been quite popular. According to TransUnion, as of the second quarter of 2025, annual home equity product originations had increased for five consecutive quarters. In the second quarter, home equity loans increased 23% among Generation Z alone. While this data may indicate that home equity loans are a good option for many homeowners, it doesn’t necessarily mean they are right for everyone. Here’s what you should think about if you’re considering a home equity loan and when it may (or may not) be a good idea to apply for one.
A home equity loan is a type of second mortgage. This means you keep your original mortgage loan and the home equity loan comes with a second monthly payment on top of your primary mortgage. It has its own terms and interest rate.
With home equity loans, you borrow against your share of home equity, which is the value of your home minus the current balance of your mortgage, and get that money in cash at closing in a lump sum. Once you receive the funds, you can use them however you want. Many homeowners use them to make home repairs and renovations or to pay off higher-interest debt, such as credit cards.
Like traditional mortgages, home equity loans use your home as collateral. This means the lender can foreclose on the property if you don’t make payments.
Home equity loans have some worthwhile benefits, especially if you need cash. Here are some advantages to consider before taking one out.
First, home equity loans typically charge much lower rates than other lending options, such as credit cards or personal loans. For example, according to the real estate analysis firm Curinos, the current average rate for home equity loans is 7.56%. According to the Federal Reserve Bank of St. Louis, the typical credit card rate is nearly 21%.
They come with fixed rates and payments.
Home equity loans also have fixed interest rates, meaning your monthly payment will never change. This is one of the main differences between home equity loans and home equity lines of credit (HELOCs), which typically charge variable rates.
With a home equity loan, you have the option to spread your costs over an extended period of time, sometimes up to 20 or 30 years. This can make it much easier to tackle a big project or pay off a major expense.
The combination of fixed rates and longer terms can result in lower, more predictable monthly payments.
There may also be tax advantages with home equity loans. If you use the funds to “purchase, build, or substantially improve” your home, you can deduct the home equity loan interest from your annual taxable income, thereby reducing your tax burden. (Please note that there is a limit on how much you can deduct. Talk to your tax preparer for more guidance.)
Despite their advantages, there are also serious disadvantages to consider with home equity loans. These include:
The biggest drawback is that home equity loans use your home as collateral. That means if you run into a financial problem and can’t make payments, the lender could foreclose on your property and you would lose your home.
Home equity loans also add a second monthly payment to the mix. Depending on your household budget, this could be financially stressful, especially if you are facing job loss or other financial hardship. Again, you put your home at risk of foreclosure.
In addition to paying interest, you will also have to pay the closing costs of a home equity loan. Typically, you can expect to pay between 2% and 5% of the total loan amount in closing costs.
Since home equity loans allow you to borrow against your share of the home’s equity, you could end up ruining your mortgage, meaning you’ll owe more on the house than it’s worth.
If that happened, you wouldn’t be able to sell your house or pay off your mortgage debts with the proceeds. This could happen if the market takes a turn and home values fall in your area.
Home equity is a powerful tool, but it has a limit. Taking out a home equity loan depletes the equity you’ve built up so far, and you’ll have less to draw on later. It also means less profit to make once you sell.
A home equity loan may be a good idea if you’re looking to pay off high-interest debt, such as credit cards or personal loans, as they generally have lower rates and can save you significantly both monthly and in the long run.
They’re also a smart strategy if you need to repair your home or cover some unexpected costs that you want to spread over time.
However, in each of these cases, you should only apply for a home equity loan if you are absolutely certain that you will have sufficient income to meet your payments for the foreseeable future. If there’s even a chance of missing payments, it’s best to stay away from these and other home equity products, or it could mean losing your home to foreclosure.
Home equity loans aren’t your only way to get cash out of your home if you need it. You can also explore these alternatives:
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Home Equity Lines of Credit (HELOC): These are similar to home equity loans, but instead of a lump sum, the lender extends a line of credit from which you can draw up to a certain amount.
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Cash Out Refinances: This replaces your current home loan with a larger one and recovers the difference between the two balances in cash. You will have a new loan, rate, term and payment once completed.
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Reverse Mortgages: These are mortgages for elderly homeowners. As the name suggests, they work like traditional mortgages, but in reverse. Instead of you paying the lender, the lender pays you with the equity in your home. You will receive funds in the form of a monthly payment, line of credit, or lump sum. You will only have to pay the money back when you sell the house or die.
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Home Equity Sharing Agreements: By sharing home equity, you give an investor a portion of your home’s future value in exchange for a lump sum payment now. You don’t have to deal with monthly payments or pay interest. You pay off when you sell the home or reach the end of the agreement term, which typically lasts 30 years or less.
Whichever option you choose, be sure to compare prices and quotes from several lenders. Rates, fees, and loan offers can vary widely from company to company.
The big drawback to a home equity loan is that it uses your home as collateral and can put you at risk of foreclosure if you don’t make your payments. This loan also affects your equity, carries closing costs, and adds a second monthly payment to your family budget.
That depends on the term and interest rate you qualify for, but at a 7.5% rate and a 30-year term, you’d pay about $350 per month for a $50,000 home equity loan.
A home equity loan comes with a one-time lump sum payment, while a HELOC offers a line of credit that you can draw on over an extended period. Home equity loans also tend to have fixed interest rates and HELOCs typically have variable interest rates.
Laura Grace Tarpley Edited this article.