The 17 Pros and Cons of Home Equity Loans

Home equity loans let homeowners borrow a lump sum against their home’s equity—often at lower interest rates than unsecured loans. With predictable payments, they’re ideal for significant expenses, such as renovations, debt consolidation, or even medical expenses. 

However, home equity loans carry risks, including possibly losing your home to foreclosure and reduced financial flexibility. This guide explores the key benefits and drawbacks to help you decide whether a home equity loan suits your needs.

Pros

• Lower fixed interest rates

• Predictable payments

• Access to a large lump sum

• Debt consolidation benefits

• Long repayment periods

• Potential tax deductibility

• Easier to qualify

• Build credit with responsible use

• Increased home value potential

Cons

• Risk of foreclosure

• Reduced home equity

• Upfront costs and fees

• Long-term debt commitment

• Limited flexibility

• Dependent on your home’s value

• Impact on future borrowing

• Risk of overspending

✅ 1. Lower fixed interest rates

One of the most significant benefits of a home equity loan is its lower interest rate compared to unsecured loans, such as credit cards or personal loans. Because the loan is secured by your home, lenders offer more favorable terms, helping you save on borrowing costs over time. 

Platforms such as our favorite marketplace, LendingTree, allow you to compare offers from multiple lenders to ensure you get the best rate, helping you make an informed financial decision.

✅ 2. Predictable payments

With structured repayment terms, home equity loans offer consistent, predictable monthly payments. This stability makes it easier to budget for the long term, particularly when the timing is right to take equity out of your home to meet your major financial goals.

✅ 3. Access to a large lump sum 

Home equity loans provide a single lump sum, ideal for significant expenses, including major renovations or predicted medical bills. For homeowners evaluating what to do with home equity, this type of loan provides the upfront funding needed to address large planned expenses.

✅ 4. Debt consolidation benefits

A home equity loan can simplify your finances by consolidating high-interest debts, such as credit cards or personal loans, into a single lower-cost payment. With a lower interest rate, you can save on interest charges over time while reducing the stress of managing multiple monthly payments.

✅ 5. Long repayment periods

Repayment terms often range from 10 to 30 years, which allows borrowers to spread payments over time and ease financial strain. This extended time frame makes home equity loans particularly appealing when covering larger projects or consolidating debt.

✅ 6. Potential tax deductibility

The interest paid on a home equity loan may be tax-deductible if the funds are used for qualifying home improvements. While tax laws can vary, this potential benefit makes using home equity for renovations or upgrades an even smarter financial decision. 

Always consult a tax professional for personalized advice.

✅ 7. Easier to qualify

Home equity loans are often easier to qualify for compared to unsecured loans because they are secured by your home. Lenders see this as lower risk, which can make approval more accessible for homeowners with sufficient equity and a solid credit history. 

This makes home equity loans a practical option for those who might not meet the stricter requirements of personal loans or other borrowing alternatives.

✅ 8. Build credit with responsible use

Making regular, on-time payments on a home equity loan can help improve your credit score over time. It demonstrates financial responsibility and contributes to a healthy payment history—two key factors in maintaining or rebuilding credit.

✅ 9. Increased home value potential

Using home equity to invest in your property, such as remodeling a kitchen or upgrading to energy-efficient systems, can increase your home’s market value. This not only enhances your living space but also helps grow your equity over time, creating a long-term return on your investment.

A home equity loan can offer many advantageous purposes. Several of the primary reasons I will recommend a home equity loan for clients include: 

• Funding home renovations that will improve the home’s market value
• Having a solid business plan to purchase additional real estate properties for investment purposes
• Funding large, planned expenses while keeping their cash reserves intact for emergency purposes

Erin Kinkade, CFP®

✖️ 10. Risk of foreclosure

The most significant risk of a home equity loan is foreclosure. Because your home serves as collateral, failure to make payments can result in losing your property. Make sure you have a reliable repayment plan before borrowing against your home equity.

A personal loan is an alternative that doesn’t require risking your home if you can’t repay. Check out our highest-rated personal loans.

✖️ 11. Reduced home equity

Borrowing against your home reduces the equity you’ve built, limiting your options for selling, refinancing, or borrowing more in the future. If you’re considering whether it’s worth using equity, it’s important to weigh this reduction against your long-term financial goals.

As an alternative, you could explore unsecured personal loans, which don’t require collateral. While these may come with higher interest rates, they preserve your home’s value and future flexibility. View our list of the best unsecured personal loans.

✖️ 12. Upfront costs and fees

Home equity loans often come with upfront costs, such as origination fees, closing costs, and appraisal charges. These can add to the total cost of borrowing, so be sure to factor them into your decision to take out a home equity loan.

If upfront costs are a concern, a cash-out refinance could help offset them. This option allows you to refinance while borrowing extra cash, meeting your needs, and ideally saving money with a lower rate. See our highest-rated cash-out refinance companies.

✖️ 13. Long-term debt commitment

Repayment terms on home equity loans are often 10 to 30 years, meaning you’re committing to long-term debt. While monthly payments are often manageable because of the long term, the extended repayment period can lead to significant interest costs over time.

You could choose a shorter repayment term on the home equity loan to pay off the debt faster and reduce total interest costs. While this may increase your monthly payments, it can help you avoid a long-term debt commitment.

✖️ 14. Limited flexibility

Unlike HELOCs, which allow you to borrow as needed, home equity loans provide a single lump sum. If you need additional funds later, you’ll need to apply for a new loan, which can be time-consuming and expensive.

For greater flexibility, a home equity line of credit (HELOC) allows you to borrow only what you need—when you need it—during the draw period. This can save you from taking out more than necessary and eliminate the need for a new loan if you need additional funds. Check out our team’s selections for the best HELOC lenders.

✖️ 15. Dependent on your home’s value

Your home’s current market value determines how much you can borrow. If property values decline, you risk owing more than your home is worth, which can limit your options for selling or refinancing.

A personal loan can be a solid alternative because it isn’t tied to your home’s value. This option allows you to borrow based on your creditworthiness, reducing the risk of being affected by fluctuations in the housing market. See the best personal loans for you based on your credit score:

• Best Personal Loans for Excellent Credit
• Best Personal Loans for Good Credit
• Best Personal Loans for Fair Credit
• Best Personal Loans for Bad Credit

✖️ 16. Impact on future borrowing

Using a large portion of your equity now can limit your ability to borrow against your home in the future. This lack of flexibility can create challenges if unexpected expenses arise down the road.

To preserve future borrowing flexibility, you might consider a HELOC. This option allows you to access and repay funds as needed during the draw period, similar to a credit card, so you don’t permanently lock up your home’s equity.

✖️ 17. Risk of overspending

A large lump sum can sometimes encourage overspending, particularly if you don’t use the funds for planned, essential expenses. Without careful budgeting, it’s easy to misuse the loan and increase your overall financial burden.
To avoid the risk of overspending, a HELOC might be a better option because it lets you withdraw only what you need when you need it. However, creating a repayment plan to stay on track with your financial goals is essential to prevent carrying an unnecessary balance and increasing your financial burden.