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both of them home equity loans i home equity lines of credit (HELOC) offer owners access to their accumulated home heritage at a much cheaper rate than many alternative credit options. while credit card interest rate are now just under 24% (an all-time high) and personal loan interest rates are around 12%, qualified homeowners can secure a home equity loan with a fee of 8.38% now and a HELOC at 8.53%. This equates to significant savings every month, and over the typical 10 to 15 years amortization period Home equity loans are usually included.
However, borrowing on your home equity is not without risk either. If you don’t pay back everything you borrowed (with interest), you could risk losing your home in the exchange. But even if you can comfortably manage your home loan payments, there are other notable risks to avoid, especially in today’s evolving economic climate with inflation rising and interest rate being reduced Below, we’ll break down three home equity loan risks to be aware of heading into 2025.
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3 home equity loan risks to know by 2025
Borrowing with a home equity loan can be both smart and effective, especially in today’s unique economic climate. To make it more valuable, owners should be aware of (and take steps to avoid) these risks:
Interest rates could rise
The hope that inflation will cool down in a straight line – and that interest rates will follow – has not happened in recent months. Inflation rose in October and again in November and now stands at 2.7%, almost a percentage point above the Fed’s 2% target. So waiting for a lower home loan-to-value rate to materialize in 2025 is risky when you can secure one close to 8% right now.
Unlike mortgage interest ratewhich are driven for variety of factorshome equity loan rates closely track the federal funds rate. So if rate cuts are paused or raised again next year, interest rates on home equity loans could rise. And them will increase in HELOCs, which they have variable interest rates which change every month. By understanding this dynamic, then, potential borrowers can avoid this risk entirely by setting a low home value loan interest rate now, and refinancing should rates fall to a considerable degree in the future.
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Home values could change
yours the home’s equity is calculated deducting the current mortgage balance from the estimated value of the home at the time of application. But housing prices can change and what your home is worth now may not be what it is worth six months from now or in December 2025. This is a positive if your home is increasing in value as it could allow you to ask for even more money (the average amount of home equity it’s currently around $320,000), but it’s a significant risk if your home’s value drops.
A significant decline in value could lead to you being “underwater” owing the lender more than your home is worth. This is particularly risky with home equity loans, which offer borrowers a lump sum of money compared to a HELOC that works like a revolving line of credit. So, before you apply, make sure that the value of your home is safe and preferably increasing.
Your debt could increase
If you use your home loan to pay or to pay consolidate debt at high interest rateslike credit cards, then you could be on your way to improving your financial health. But if you use it for the wrong reasons, such as paying off depreciating assets like cars or one-off expenses like weddings, you could find yourself in a spiral of spiraling debt that will be hard to get out of. So make sure you use your home equity loan for safe and effective purposes (such as home repairs and reforms, which have potential tax benefits) and avoid using it in ways that could make your debt harder to pay off than it already is.
The bottom line
A home equity loan gives borrowers access to a large amount of money, potentially six figures, at a much lower interest rate than some popular alternatives. But it also comes with risks that owners will have to navigate. By being aware of these risks for 2025 and using your funds for the most appropriate and safe reasons, you can position yourself for sustained equity debt success in the new year and the following years.
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