A home equity loan should generally not be used for consumable goods, depreciating assets, or discretionary lifestyle expenses, as this risks your home for items with no long-term value. Avoid using it for vacations, luxury items, purchasing cars, or covering daily living expenses.
Beyond differences in cost, it's also essential to bear in mind that failing to make payments on a home equity loan or line of credit exposes you to the risk of foreclosure. Given the risks, tapping your home equity to pay for school may not make sense.
Making home improvements and upgrades. Paying medical bills. Making key purchases, such as a car or a truck. Funding investments.
The main disadvantages of a home equity loan are the risk of foreclosure (using your home as collateral), incurring closing costs and fees, adding to your total debt, the need for significant equity to qualify, and less flexibility than a HELOC, with potential for higher rates or reduced equity if property values fall.
🏠 Why You Should Avoid Home Equity Loans
With a home equity loan, you borrow money against your home. It's taking the supposed equity and using that to get cash for other needs. In short, it's stupid. This type of loan means you're risking the roof over your family.
HEI providers tend to be more flexible with credit scores, income verification, and debt-to-income ratios compared to traditional lenders. This makes it a viable option for homeowners who are self-employed, have recently gone through hardship, or do not qualify for conventional financing.
How long do you have to repay a HELOC? HELOC funds are borrowed during a “draw period,” typically 10 years. Once the 10-year draw period ends, any outstanding balance will be converted into a principal-plus-interest loan for a 20-year repayment period.
For example, a home equity loan offers a fixed interest rate. Another option is a cash-out refinance, which can offer better rates and repayment options, depending on the results of your blended rate calculation.
It typically takes two to six weeks to close on a HELOC, but the fastest lenders in the business can get you to close in just five to seven days. If you're wondering which HELOC lender closes fastest, read on — we'll go through which lenders have the quickest HELOC processing times.
A HELOC (Home Equity Line of Credit) is a revolving loan, like a credit card, offering flexible draws with interest payments, while a HEI (Home Equity Investment) provides a lump sum upfront for a share of your home's future value, with no monthly payments but a larger repayment later. The main difference is the trade-off: a HELOC adds debt and monthly costs but offers predictable interest, while an HEI offers immediate cash without payments but shares future appreciation (or depreciation) with the investor, making it better for those wanting cash flow now over long-term equity.
Homeowners can usually repay in full prior to the end of the term if they choose, but they generally can't make partial payments. Some companies also have restrictions on repayment early in the term. As a result, consumers can typically repay the home equity contract early only if they have the full repayment amount.
The cheapest way to get equity out of a house is often a Home Equity Line of Credit (HELOC), due to lower upfront costs and paying interest only on what you use, but a Home Equity Loan (fixed rate, lump sum) or Cash-Out Refinance (if rates are lower) can be cheaper depending on market rates, while Sale-Leasebacks or Reverse Mortgages (for seniors) offer payment-free options with different trade-offs. Always compare lender fees, interest rates (variable vs. fixed), and your financial goals before choosing, as the "cheapest" option varies.
Using your home equity to borrow money can often be a better option than a 401(k) loan because it doesn't negatively affect your retirement savings. You can also change jobs without being required to quickly repay the loan.
Suze Orman strongly advocates paying off your mortgage by retirement for financial freedom and peace of mind, but her advice on how varies by situation, often prioritizing a solid emergency fund and retirement savings first, especially if interest rates are low. While she pushes for paying down debt aggressively (even reducing retirement savings beyond the 401(k) match), she cautions against draining savings for low-interest mortgages if it leaves you vulnerable to job loss or emergencies, suggesting you should have a strong safety net before using savings to pay it off.
It will take effort, discipline and, perhaps, some outside help, but you can make it if you do the following: