Watch CBS News

Are home equity loans worth it?

Interest on home equity loans may be tax deductible if used for IRS-approved purposes.  Catherine Falls Commercial/Getty Images

During times of economic uncertainty and high inflation, many people may find themselves looking for extra ways to make ends meet. This can take the form of a new part-time job or passive income source or it could mean taking out new credit like personal loans or credit cards. For homeowners, their biggest investment could also be a source of economic support via a home equity line of credit (HELOC) or a home equity loan.

Home equity loans work like a second mortgage. Owners simply take out a loan from the amount of equity they currently have in their homes. Lenders usually require borrowers to keep at least 15% to 20% equity in the home, but other than that, the money can be used as the homeowner sees fit. It will need to be repaid in monthly installments, just like the regular mortgage. 

But are home equity loans worth it or should homeowners instead turn to other options? That's what we will discuss below. 

If you're a homeowner considering a home equity loan, explore your home equity loan options here or simply use the table below to learn more.

Are home equity loans worth it?

Every homeowner's personal circumstances and financial goals are different. That said, here are three reasons why a home equity loan could be worth it for you:

Lower interest rates

Because you're accessing the money in your home - and because, in theory, you've already proven yourself to be credit-worthy - you'll generally be able to secure a lower interest rate with a home equity loan than you would if you went looking for other forms of credit. Interest on credit cards currently hovers around the 15% to 20% mark, while personal loans are around 10% to 11%.

By comparison, you could obtain a home equity loan at an 8% interest rate or lower, depending on your credit score and history at the time of application. Just note that you will have to pay closing costs on a home equity loan so account for that extra expense while comparing all of your potential credit options.

If you think a home equity loan is worth it for you, get started by researching your options online or in the table below. 

It may be tax-deductible

If you took out a home equity loan intending to make major home repairs, renovations or improvements, you may be able to deduct the interest you paid on the loan when it comes time to file your taxes. 

"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 IRS says. "The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements."

If you're planning on using your loan for IRS-approved reasons, you'll be covered when you file your return. But don't use it for other purposes and expect to get the same deduction.

"Generally, you can deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 8a," the IRS says. "However, any interest showing in box 1 of Form 1098 from a home equity loan, or a line of credit or credit card loan secured by the property, is not deductible if the proceeds were not used to buy, build, or substantially improve a qualified home."

It has a fixed interest rate

It can be stressful dealing with any type of loan or credit with a fluctuating interest rate. While this may be advantageous when rates are low, it can quickly become difficult to navigate as rates rise. Fortunately, unlike some other credit options, a home equity loan comes with a fixed interest rate, making it easier for borrowers to budget each month.

Rates will depend on a variety of personal factors, but once a low rate is secured, borrowers can rest easy knowing that what they will be expected to pay on month one will be the same amount they'll have to pay in the loan's closing months.

The bottom line

HELOCs and home equity loans both offer homeowners a unique opportunity to use their homes as a source of income. Home equity loans, in particular, can be advantageous for multiple reasons.

Due to its lower interest rates and favorable tax deduction (if used for eligible purposes), a home equity loan may be worth it for many homeowners. And unlike other credit types with fluctuating interest rates, home equity loans come with a predictable and reliable fixed interest rate.

Explore your home equity loan options here now and see if it's worth it for you!

View CBS News In
CBS News App Open
Chrome Safari Continue
Be the first to know
Get browser notifications for breaking news, live events, and exclusive reporting.