How to use (and not use) a home equity loan this spring, according to experts

Interest rates have been falling across the board lately — on mortgage loans, on savings accounts, and, lucky for homeowners, on home equity products, too.

The latter have dipped quite a bit, actually. Over the last year, the rate on 10-year home equity loans has fallen from 8.55% to just over 8% today. While that doesn't sound like much on paper, in reality, it can amount to significant savings for many borrowers, both monthly and in long-term interest. And if you shop around, it's possible to find a home equity loan interest rate in the 7% range, assuming you're a qualified borrower.

But despite their growing affordability, home equity loans aren't always the right choice when you need cash. Heading into the spring, there are a few current scenarios in which experts say a home equity loan would be a smart move — and a few in which you should explore other options. Below, we'll break down how to use (and not use) this unique borrowing tool in the upcoming season.

Start by seeing how much home equity you have to borrow here.

How to use a home equity loan this spring

Not sure if a home equity loan is the right borrowing tool for you this spring? Here's when it may be:

If you're paying off your credit cards 

While rates on home equity loans have been falling, credit card rates have decreased at a much slower clip. On the average card, consumers are still paying nearly 21% — almost triple the current rates on home equity loans.

For this reason, home equity loans can often be a good tool for consolidating credit card debt.

"A home equity loan will always have a higher rate than your first mortgage because they are in a second-lien position, but more times than not, consumer interest rates are much higher — especially if you have a running balance," says Jeremy Schachter, branch manager at Fairway Home Mortgage. "Consolidating your debt with a home equity loan would give you one manageable payment with a lower interest rate."

Paying off your credit cards with a home equity loan also brings more stability to your financial situation, says Karri Noble, senior vice president of home equity operations at loanDepot.

"Home equity loans come with fixed rates, which allow for predictability of monthly payments and can make budgeting easier, offering even 20- and 30-year loans," Noble says. "This option is for you if you prefer a more stable, long-term financing plan. It also helps protect you from future rate fluctuations no matter how the market shifts."

Explore your top home equity loan options online here.

If you have a really good rate on your main mortgage

Many times, refinancing your main mortgage can be a great way to access your home equity and get some cash. But it also means replacing your new loan with a new one. 

With some homeowners still holding on to the ultra-low interest rates of the pandemic (think 2% and 3%), that's not the case for everyone. 

"We are in a market where most existing homebuyers who purchased or refinanced between 2020 and 2022 have excellent, near record-low mortgage rates — and who wants to get rid of those?" asks Kendra Haag, a home loan specialist at Churchill Mortgage. "A home equity loan is a great tool if you wish to tap into your equity without modifying your existing mortgage rate."

(Maybe) if you're looking for a financial safety net

With prices on many goods and services rising lately — albeit at a slower pace — you might be looking for a financial safety net in case things go south. 

While a home equity loan can be an option for those "just in case moments," Haag says, it also means taking on another monthly payment, which could be "biting off more than you can realistically chew."  

A better option might be a home equity line of credit (HELOC). With HELOCs, you can withdraw money only when you need it — and only then will you pay interest on what you take out. Home equity loans, meanwhile, come with lump-sum payments, and you'll pay interest on your full balance from the start.

"You start paying interest on the home equity loan at the time of closing," Schachter says. "A HELOC might be a better option if you are not sure when you will use the funds for the loan."

How to not use a home equity loan this spring

On the other hand, there are some reasons why you may not want to use a home equity loan this spring. Here's when to avoid it:

If you're looking to invest in something higher-risk

Tapping your home equity to invest in stocks, Bitcoin, or some other risky asset probably isn't the best bet, experts say, especially right now.

"The market has been very volatile, and the climate of investments can be extremely risky," Haag says. 

The volatility doesn't just mean potentially losing your investment, but if you lose enough money and can't make your payments — on either your main mortgage or your home equity loan, you could lose your home.

"In today's volatile market, whether in stocks, crypto, or other higher‑risk investments, you could lose part or all of the money you borrowed," Noble says. "Plus, when you take out a home equity loan, your home serves as collateral. Failure to repay can lead to foreclosure." 

If you're funding a spring break or summer trip

Spring break is quickly approaching for many families, and while it can be tempting to use that hard-earned equity to fund some much-needed R&R, experts caution against this.

"It's never a good idea to use credit to purchase something you cannot afford," Haag says. "After all, your $5,000 trip could end up costing you $8,000 or more due to added interest over the time it takes to pay off the debt."

The bottom line

While there are smart and ineffective ways to use a home equity loan this spring, it isn't your only borrowing option, either. There are plenty of alternatives if a home equity loan isn't a good fit for you now. Cash-out refinancing, HELOCs and reverse mortgages are all other options for tapping your home equity and rates on some of these products are currently dropping. If you're not sure how to best tap your equity, contact a mortgage professional or financial advisor. They can look at your finances and recommend the smartest path forward.