Many people who took advantage of past low interest rates don’t want to refinance their mortgages. Yet, they still might need funds for home improvement projects or debt consolidation. That’s when tapping into home equity becomes an attractive option.
But is it a wise option? Tapping into your home’s equity may create a significant risk. It’s essential to have all the facts before deciding on whether to take this step. Having the right reasons for accessing your home’s equity is also imperative.
Consumers Built Equity in Their Homes
According to ICE Mortgage Technology’s June 2025 Mortgage Monitor report, U.S. mortgage holders carried a record $17.6 trillion in home equity entering the second quarter of 2025.
Forty-eight million mortgage holders have tappable equity, with the average homeowner sitting on $212,000.
With the spread to prime falling to the lowest levels since 2022, many lenders have been more aggressive with their home equity lines of credit (HELOCs) rate offerings, according to the report.
Home Equity Loans and HELOCs
There are a few ways to tap into a home’s equity. Some include refinancing and taking a cash-out, taking a home equity loan, or taking a HELOC.
When the prime rate is high, many homeowners with low rates don’t wish to refinance. A home equity loan gives you a lump sum for a specified time. Your rate is locked in for the duration of the loan’s term.
Funds from a HELOC are not given to you in a lump sum. You withdraw only what you want at any time up to a specified limit. You only pay interest on the funds that you withdraw.
A HELOC has a variable interest rate. A variable interest rate changes depending on the prime rate. If the prime rate goes up, the variable rate usually increases and vice versa. A fixed interest rate always remains the same. (The prime rate is the interest rate that banks use as a base for setting rates on loans, credit cards, and other lines of credit.)
Some lenders will convert a HELOC to a fixed rate. In that case, it doesn’t change with the prime rate. The fixed rate remains the same regardless of economic conditions.
With the variable rate tied to the prime rate, the Federal Reserve’s moves regarding the prime rate affect HELOCs. This is the danger to most HELOCs as well as an advantage, depending on how the Fed cuts or increases the prime rate.
Regardless of whether you have a HELOC or home equity loan, you are using your home as collateral, and there lies the rub. If you don’t make your payments, you could lose your home.
Home Equity Loan and HELOC Risks
The biggest risk is that your home is on the line.
Tapping into your credit cards will generate unsecured debt. If you default on credit cards, you risk late fees and a lower credit score.
If you default on a home equity loan or HELOC, the lender could foreclose on your home. Ensure you understand the loans’ terms and conditions. Check your budget. Remember, if you still have a mortgage, you’ll be responsible for paying two loans.
Change in Home Values
When you tap into your equity, you reduce your ownership stake. This can be a problem if property values fall. You could end up owing more than your home is worth. This is also known as being underwater.
Being underwater can limit your ability to sell or refinance your home.
Currently, home prices are high, but there has been some slowdown. This is because buyers are waiting for both a bigger home supply and lower interest rates.
Interest Rate Rising With Loans
Home equity loans come with a fixed interest rate. So, the homeowner knows exactly how much the monthly payment will be for the entire loan. But with many HELOCs, the rate is adjustable and has the potential to increase.
A HELOC interest rate is tied to the prime rate and will move up if there’s inflation. Because interest rates are unpredictable, the borrower may end up paying more than what they originally signed up for.
In the worst-case scenario, monthly payments could become unaffordable.
Payment Increases With Time
With a HELOC, you can repay the borrowed amount at any time. Typically, HELOCs allow interest-only payments during the draw period. A draw period is usually 10 years, and is when you can access funds.
Once the draw period ends, both the principal and interest must be repaid. The monthly bill increases. This can be sticker shock for many individuals.
Some individuals may have difficulty making these payments and jeopardize their homes.
Use Home Equity Wisely
Although you may be using your home equity to pay down debt or do home improvements, it’s important that you know the facts.
Unlike unsecured credit, such as a personal loan or credit cards, you’re offering your home as collateral for the loan. And if you have a downward turn in income or the economy goes bad, you are in danger of foreclosure if you can’t repay the borrowed money.
The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
