Is a home equity loan a good idea? Here are the pros and cons.

Recently, home equity loans have been pretty popular. According to TransUnion, as of the second quarter of 2025, annual home equity product originations had increased for five consecutive quarters. In quarter two, home equity loans jumped by 23% among Gen Z alone. While this data may signal that home equity loans are a good fit for many homeowners, it doesn’t necessarily mean it’s the right fit for everyone. Here’s what to 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 in addition to your main mortgage. It has its own terms and interest rate.

With home equity loans, you borrow from your equity stake, which is your home’s value minus your current mortgage balance, and get that money in cash at closing in one lump sum. Once you receive the funds, you can use them however you’d like. Many homeowners put them toward making home repairs and renovations or paying off higher-interest debts, 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 fail to make payments.

Home equity loans have some worthwhile benefits, especially if you need cash. Here are a few pros to consider before taking one out.

First of all, home equity loans usually charge much lower rates than other borrowing options, such as credit cards or personal loans. For example, according to real estate analytics 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 come with fixed interest rates, which means your monthly payment won’t ever change. This is one major way home equity loans differ from home equity lines of credit (HELOCs), which typically charge variable rates.

With a home equity loan, you have the option of spreading your costs out over an extended period of time — sometimes as much as 20 or 30 years. This can make affording a big project or paying for a large expense considerably easier.

The combination of fixed rates and longer terms can result in lower, more predictable monthly payments.

There can also be tax advantages with home equity loans. If you use the funds to “buy, build, or substantially improve” your house, you can deduct your home equity loan interest from your annual taxable income, thus reducing your tax burden. (Keep in mind, there is a limit to how much you can deduct. Talk to your tax preparer for more guidance.)

Despite their perks, there are serious downsides to consider with home equity loans as well. These include:

The biggest drawback is that home equity loans use your home as collateral. That means if you hit a financial snag and can’t make payments, the lender could foreclose on your property, and you’d lose your house.

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 face a job loss or another financial hardship. Again, it puts your home at risk of foreclosure.

In addition to paying interest, you’ll also owe closing costs with a home equity loan. You can typically expect to pay between 2% and 5% of the total loan amount in closing costs.

Since home equity loans allow you to borrow from your equity stake, you could end up going upside-down on your mortgage — meaning you’d owe more on the home than it’s worth.

Should that occur, you’d be unable to sell your home and pay off your mortgage debts with the proceeds. This might happen if the market takes a turn and home values fall in your area.

Home equity is a powerful tool, but there’s only so much of it. Taking out a home equity loan depletes the equity you’ve built so far, and you’ll have less to leverage later on. It also means less profit to reap once you sell.

A home equity loan can be a good idea if you’re looking to pay off high-interest debts like credit cards or personal loans, as they typically come with lower rates and can save you significantly both monthly and over the long haul.

They’re also a smart strategy if you need to repair your house or cover some unexpected cost you want to spread out over time.

In each of these cases, though, you should only take out a home equity loan if you’re absolutely confident you will have enough income to afford your payments for the foreseeable future. If there’s even a chance you could miss payments, it’s best to steer clear of these and other home equity products, or it could mean losing your house 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:

Home equity lines of credit (HELOCs): These are similar to home equity loans, but instead of a lump sum, the lender extends a line of credit you can withdraw from, up to a certain amount.

Cash-out refinances: This replaces your current mortgage loan with a larger one, and you get the difference between the two balances back in cash. You’ll have a new loan, rate, term, and payment once complete.

Reverse mortgages: These are mortgages for senior-aged homeowners. As the name suggests, they work like traditional mortgages, but in reverse. Rather than you paying the lender, the lender pays you out of your home equity. You’ll receive funds either in the form of a monthly payment, a credit line, or a lump sum. You only have to repay the money when you sell the house or pass away.

Home equity sharing agreements: With home equity sharing, you give an investor a share of your home’s future value in exchange for a lump sum payment now. You don’t have to deal with monthly payments or paying interest. You settle up when you sell the house or reach the end of your agreement term, which typically lasts for 30 years or less.

Whichever option you choose, make sure you shop around and compare quotes from several lenders. Rates, fees, and loan offerings can vary widely between one company and the next.

The big negative of 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 eats into your equity, comes with closing costs, and adds a second monthly payment to your household budget.

That depends on the term and interest rate you qualify for, but at a 7.5% rate and 30-year term, you’d pay about $350 per month for a $50,000 home equity loan.

A home equity loan comes with a single, lump-sum payment, while a HELOC offers a line of credit that you can withdraw from over an extended period. Home equity loans also tend to have fixed interest rates, and HELOCs usually have variable ones.

Laura Grace Tarpley edited this article.