What is the downside to getting a home equity loan?
Asked by: Emie Jacobi DDS | Last update: February 11, 2026Score: 4.1/5 (46 votes)
The main downside to a home equity loan is the significant risk of foreclosure, as your home serves as collateral, meaning you could lose it if you default on payments. Other drawbacks include incurring closing costs, adding another monthly payment to your budget (on top of your primary mortgage), potential for higher interest rates than some alternatives, and increasing your overall debt load, which can put you "underwater" (owing more than the home is worth) if property values fall.
Why shouldn't you take out a home equity loan?
Home Equity Loan Disadvantages
Higher Interest Rate Than a HELOC: Home equity loans tend to have a higher interest rate than home equity lines of credit, so you may pay more interest over the life of the loan. Your Home Will Be Used As Collateral: Failure to make on-time monthly payments will hurt your credit score.
How long do you usually have to pay back a home equity loan?
How long do you have to repay a HELOC? HELOC funds are borrowed during a “draw period,” typically 10 years. Once the 10-year draw period ends, any outstanding balance will be converted into a principal-plus-interest loan for a 20-year repayment period.
Can you lose your house with a home equity loan?
Equity is the value of your home minus the amount you owe on your mortgage. Consider a HELOC if you are confident you can keep up with the loan payments. If you fall behind or can't repay the loan on schedule, you could lose your home.
What does Dave Ramsey say about home equity loans?
Ramsey says he would never recommend a home equity loan or line of credit. While Ramsey acknowledges some potential benefits, he believes the risks—including putting your home at stake—far outweigh any advantages.
HELOC vs Home Equity Loan: The Ultimate Comparison
What is the 3 7 3 rule in mortgage?
The "3-7-3 Rule" in mortgages refers to federal disclosure timing under the TILA-RESPA Integrated Disclosure (TRID) rule, ensuring borrower protection: lenders must provide the initial Loan Estimate within 3 business days of application, require a 7-day waiting period before closing from that delivery, and trigger another 3-day waiting period if the Annual Percentage Rate (APR) changes significantly (over 1/8% for fixed loans) before closing. This rule, stemming from the Mortgage Disclosure Improvement Act (MDIA), provides crucial time for borrowers to review and compare loan terms, preventing rushed decisions.
Is it wise to use home equity to pay off debt?
Using a home equity loan for debt consolidation will generally lower your monthly payments since you'll likely have a lower interest rate and a longer loan term. If you have a tight monthly budget, the money you save each month could be exactly what you need to get out of debt.
What is the catch to a home equity loan?
The main "catch" to a home equity loan is that your home secures the loan, meaning you risk foreclosure if you can't make payments, plus you pay closing costs (2-5%) and reduce your available equity, potentially owing more than the house is worth if values drop. While offering lower rates than credit cards, it adds a second mortgage payment, comes with fees, and gives a one-time lump sum, unlike flexible HELOCs.
Which is better, a home equity loan or refinance?
If your mortgage rate is higher than currently available refinance rates, a cash-out refinance may help you lower your rate. If your mortgage rate is below currently available refinance rates, a home equity loan may be a better choice.
What happens to home equity when the home is paid off?
If the mortgage has been paid in full, you have 100 percent equity in your home. However, even with a 100 percent stake, you cannot borrow all of that money. Generally, lenders allow for borrowing up to 80 to 85 percent of a home's appraised value.
What disqualifies you from a home equity loan?
You can be disqualified from a home equity loan for having insufficient home equity (often needing 20%+), a low credit score (below ~620), a high debt-to-income (DTI) ratio (over ~43%), unstable income, a recent bankruptcy/foreclosure, or outstanding legal issues like tax liens, as lenders prioritize low risk and financial stability, with property type and available credit also mattering.
What is the cheapest way to get equity out of your house?
The cheapest way to get equity out of a house is usually a Home Equity Line of Credit (HELOC), due to lower upfront costs, interest-only payments on what's drawn, and flexibility, but a Home Equity Loan (fixed rate, lump sum) or even a Cash-Out Refinance (if rates are very low) can be cheaper depending on your situation and current interest rates. For seniors, a reverse mortgage is an option, while newer options like Home Equity Investments (HEIs) share future appreciation but have no monthly payments.
How much a month is a $100,000 home equity loan?
A $100,000 home equity loan payment varies significantly with interest rates and term, but expect roughly $960 to $1,240/month for 10-15 year fixed loans, while a Home Equity Line of Credit (HELOC) might start with low, interest-only payments around $580-$830/month during the draw period, then jump to higher principal & interest payments later, like $1,160-$1,320/month at 7-10% rates.
What not to do when getting a home equity loan?
DON'T take out excessive equity.
Also keep in mind that a home equity loan or line of credit decreases the amount of equity you have in your home. If you have taken out too much equity and the real estate market drops you can end up losing all the equity in your home.
Who is a hei best for?
HEI providers tend to be more flexible with credit scores, income verification, and debt-to-income ratios compared to traditional lenders. This makes it a viable option for homeowners who are self-employed, have recently gone through hardship, or do not qualify for conventional financing.
What is the monthly payment on a $70,000 home equity loan?
A $70,000 home equity loan payment varies by interest rate (APR) and term, but expect roughly $680 - $870/month for a 10-year loan and $480 - $690/month for a 15-year loan, depending on current rates around 8.4% - 8.7%; for example, at 8.5% over 10 years, it's about $860, and at 8.4% over 15 years, it's around $680, with lower rates meaning lower payments.
What is the 2% rule for refinancing?
The "2 rule" for refinancing generally refers to lowering your interest rate by at least 2 percentage points to offset closing costs and save money long-term, but it's a flexible guideline, not strict law. A second interpretation, particularly in Texas, limits lender fees (excluding some costs like appraisal) to no more than 2% of the loan amount for cash-out refinances, as seen with Texas Section 50(a)(6) rules. The best decision depends on your break-even point and how long you'll stay in the home, with some suggesting even a 1% drop can be worthwhile over time.
Can you pull equity out of your home without refinancing?
Yes, you can take equity out of your house without refinancing by using a Home Equity Loan, HELOC (Home Equity Line of Credit), Home Equity Investment (HEI), Reverse Mortgage (for seniors), or a Sale-Leaseback Agreement, all of which allow you to access funds while keeping your primary mortgage intact. These methods involve borrowing against your home's value or selling a share of its future appreciation, offering different structures like lump sums, revolving credit, or cash for a stake in the property.
Is a home equity loan tax deductible?
Note: Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan. The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements.
Is it smart to borrow against home equity?
Taking equity out of your home can be a smart way to access low-interest funds for major expenses like home improvements, debt consolidation, or education, but it's risky because you're using your home as collateral and could face foreclosure if you can't repay the loan. It's generally a good idea for investments that build wealth or significant, planned needs, but a poor choice for vacations or routine bills, as it adds debt and reduces your home's value.
What to know before taking out a home equity loan?
Typically, a home equity loan has a higher interest rate compared to a mortgage loan. Your home is also used as collateral for the loan. As a result, it's important not to borrow more than you can repay. If you default, the bank may foreclose and take the home.
Why is a home equity loan risky?
If your investment doesn't perform as you'd hoped and you can't repay your loan, you can lose the collateral supporting the loan—in this case, your house. Even if you don't lose your house, you could lose the equity in your home that you might have built up over many years.
How to pay $30,000 debt in one year?
To pay $30,000 in debt in one year, you need to pay $2,500 monthly, requiring aggressive budgeting, cutting expenses, increasing income (side hustles, selling items), potentially consolidating debt at a lower interest rate, and making extra payments whenever possible to tackle the principal faster, using strategies like the avalanche method to save on interest.
Which is better, debt consolidation or home equity loan?
Typically, home equity loans have significantly lower interest rates than debt consolidation loans. Both home equity and debt consolidation loans are more likely to be fixed rate, unlike the variable (changing) rates on credit cards. That means payments, which are the same every month, are easier to budget.
What is the 2 rule for paying off a mortgage?
The "2% rule" for mortgage payoff generally refers to two strategies: either refinancing to a rate 2% lower, or adding an extra 2% to your monthly payment to significantly shorten your loan term and save on interest. The first method (refinancing) helps if rates drop significantly, while the second (extra payments) involves paying a small extra amount monthly, like an extra $50 on a $2,500 payment, to build equity faster and pay off the mortgage years sooner. Both methods aim to reduce total interest paid and accelerate payoff, though current interest rate environments make the refinance rule less common, while adding extra money always speeds up amortization.