3 costly home equity loan mistakes to avoid this February
A home equity loan comes with multiple advantages for borrowers, many of which remain timely in the economic climate of early 2025. For starters, interest rates on these loans (around 8.50%) are much cheaper than personal loans (nearing 13%) and credit cards (around a record 23%). The amount of money that can potentially be borrowed, however, is also high with the average owner in possession of around $320,000 worth of equity. That could change, too, if home prices continue rising in many markets of the country, as they're expected to. Additionally, if borrowers used a home equity loan in 2024, for example, they may be eligible for a significant reduction on their taxes when they file their return this spring.
But home equity loan borrowing comes with inherent risks, too, that will also need to be managed. Since the home in question functions as collateral, these risks must be carefully avoided, particularly in today's economy in which inflation is rising and interest rate cut relief appears delayed. Against this backdrop, borrowers should know some costly home equity loan mistakes to avoid this February. Below, we'll detail three of them.
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3 costly home equity loan mistakes to avoid this February
Here are three important and potentially expensive home equity loan borrowing mistakes to avoid this month:
Waiting for rates to fall further
Home equity loan rates could fall again later in 2025. But it's not a guarantee and when, precisely, in 2025 those rates will potentially fall is unknown at the moment. The Federal Reserve just paused its interest rate-cutting campaign after issuing three cuts in the final months of 2024. According to the CME Group's FedWatch tool, there's only a 43% chance of a rate cut at the bank's June meeting and, in the months prior, that percentage is even lower.
Waiting for months to act, then, could be costly. Not only will you delay paying for expenses that you have now, but waiting could prove to be fruitless if rates don't fall later this year. Instead, consider locking in a low rate now – and look to refinance if (and when) rates do come back down.
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Not shopping around for lenders
The average home equity loan interest rate is 8.45% now. But that's the average. It's possible to find a rate even lower by shopping around for lenders. Homeowners don't need to be locked into using their current mortgage lender when pursuing a home equity loan. They can get a home equity loan with a different bank. So why not shop around to see what better (and lower offers) are potentially available?
With no Federal Reserve meeting scheduled for February, borrowers won't need to worry about an immediate change in rates. Instead, they can use this month to research, shop and compare offers and lenders.
Applying with mediocre credit
The best rates and terms will always be reserved for borrowers with high credit scores. And that's no different for home equity loans, even if you've been making your current mortgage payments on time each month. So if you don't have a good credit score, consider using this month's lull in the Federal Reserve meeting calendar to improve it. That means paying down old debts, refraining from applying for any new ones and reviewing your credit report for any errors or inaccuracies. By taking these steps now, you can potentially improve your credit score before applying for a home equity loan in March.
The bottom line
This February offers prospective home equity loan borrowers a rare opportunity to act without the pressures of a pending Federal Reserve meeting to impact home equity loan interest rates. But that doesn't mean homeowners should act carelessly either. By avoiding these three mistakes and by taking a strategic and nuanced approach to borrowing from their home equity, owners will better position themselves for success both in the months of 2025 and, potentially, years to come.
