3 home equity borrowing traps to avoid in today's economy
Borrowing from your home equity can be a smart move in most economic climates, but especially in today's unpredictable one. Despite stock market uncertainty and inflation concerns, homeowners can still rely on their home as a trusted funding source. With a home equity loan or home equity line of credit (HELOC), homeowners can potentially gain access to hundreds of thousands of dollars right now (the average home equity amount sits around $300,000). And they can access that money at an interest rate materially lower than what they'd otherwise secure with a personal loan or credit card.
Still, borrowing from your home equity isn't risk-free, either. Failure to repay all that's been withdrawn with a HELOC or home equity loan could result in foreclosure on the property in question. So homeowners must take the right steps at the right time to avoid this situation. To more effectively do so, it helps to know some home equity borrowing traps to avoid in today's economy. Below, we'll detail three important ones that homeowners should familiarize themselves with now, before applying with a lender.
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3 home equity borrowing traps to avoid in today's economy
While the following list is not exhaustive, it can help homeowners avoid some costly mistakes if they're planning to borrow against their home equity in today's economic climate. Specifically, borrowers should avoid:
Assuming their home value will always increase
Sure, home values have increased in many parts of the country in recent years. But many parts of the country isn't the whole country and there are some places in which home values have declined recently and are poised to continue to do so in the near future.
What does this have to do with home equity borrowing? Well, it could easily impact how much home equity you have to utilize, even after a loan or HELOC has been secured. If your home value drops precipitously, for example, your HELOC could even be frozen. So, no matter where you live, don't borrow from your home equity on the assumption that values will always increase. If the unexpected happens and your home value dips, you could find yourself "underwater" by owing more than than the home is worth.
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Assuming HELOC rates will continually fall
HELOC interest rates hit an 18-month low in early 2025. And that was followed by multiple, two-year lows in the weeks that followed. Currently, HELOC rates are just under 8%, marking a more than two-point drop since September 2024. And that's a major advantage for current borrowers since rates here are variable and subject to change monthly. But it's a trap to simply assume this downward trend will continue unabated.
Any number of factors, both predicted and unforeseen, could shake up the rate climate yet again and cause HELOC rates to reverse their decline. So don't expect this product to become continuously less expensive. Instead, calculate your HELOC repayment costs against a series of realistic rates (what's available now and what could be available in the upcoming months and years). This way, you'll be able to budget more accurately and avoid any major surprises. And if you ultimately decide that the variable rate, as beneficial as it is now, is too risky long-term, you may be better served by exploring your fixed-rate home equity loan options instead.
Assuming they won't sell their home
It's relatively simple and affordable to borrow equity from the home you're currently living in. But assuming you won't be selling your home in the future is a mistake homeowners should avoid. Life changes could result in you needing to increase the size of your home, or you may look to downsize in retirement.
Either way, the money you borrowed from your home via a HELOC or home equity loan will need to be repaid, first (a lien is put on the property to ensure your lender gets what's outstanding from any mortgage sales profits). So just keep this in mind when exploring your home equity borrowing options, particularly if you're tempted to borrow a large, six-figure sum. That amount could substantially reduce what your home is worth and, ultimately, lead to a reduced value either for you or your beneficiaries when the home in question is eventually put on the market.
The bottom line
Home equity loans and HELOCs are powerful and effective borrowing tools that could help homeowners consolidate debt, finance major home repairs and renovations and function as reliable emergency funds. But they're not risk-free, either. By avoiding these three traps prospective borrowers and those who have already started tapping into their equity can better position themselves for long-term borrowing success, keeping their home and its value relatively high and secure in the process.
