Taking out a home equity loan carries significant risks, primarily that your home serves as collateral, meaning default can lead to foreclosure. It increases your total debt load, often requires closing costs (2%–5% of the loan amount), and can leave you "underwater" (owing more than the home is worth) if property values decline.
Ramsey says he would never recommend a home equity loan or line of credit. While Ramsey acknowledges some potential benefits, he believes the risks—including putting your home at stake—far outweigh any advantages.
Home equity loan funds should not be used for depreciating assets or lifestyle expenses like vacations, luxury cars, or weddings, as these don't build equity and risk foreclosure if payments fail; instead, use them for appreciating assets or large, planned investments like home improvements, education, or debt consolidation to increase your home's value or financial stability.
Potential to Lose Your Home
Each of these methods involves taking out a loan that must be repaid with interest, in addition to fees and costs charged for these loans. Failure to pay on any loan against home equity can result in foreclosure, meaning you could lose your home.
But tapping into your home equity isn't always a good idea. It's crucial to be cautious when considering using home equity because home equity loans, home equity lines of credit (HELOCs) and cash-out refinances are secured by your home. That means you could lose your home if you fail to make monthly loan payments.
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.
The main "2 rule" for refinancing is getting your interest rate at least 2 percentage points lower, but other key considerations include calculating your break-even point (how long to recoup closing costs) and your reason for refinancing (lower payments vs. shorter term). A significant rate drop (like 2%) usually makes refinancing worthwhile if you stay long enough, but even smaller drops can save you money over time, especially with high loan amounts or long stays.
The 3-7-3 Rule in mortgages isn't a loan type but a federal timeline from the TILA-RESPA Integrated Disclosure (TRID) rule, ensuring borrower protection by mandating disclosures within 3 business days of application, a 7-business-day wait between the initial Loan Estimate and closing, and another 3-day wait if significant changes (like APR) occur, giving borrowers time to review costs before committing to a loan.
It will take effort, discipline and, perhaps, some outside help, but you can make it if you do the following:
Taking equity out of your home can be a smart financial move for major, value-adding expenses like renovations or education, offering lower rates than credit cards, but it's risky and best avoided for discretionary spending due to the danger of foreclosure if you can't repay the loan, making it crucial to weigh the benefits against the risk of turning your home into debt.
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.
If you were able to secure the average HELOC rate right now — 8.12% — here's how much a $75,000 HELOC would cost monthly in 2025, assuming a constant rate tied to two common repayment periods: 10-year HELOC at 8.12%: $914.72. 15-year HELOC at 8.12%: $721.94.
Before using a HELOC, it's important that homeowners evaluate whether it's a wise investment and determine how it will impact their home's equity. If the money is being put toward renovations, for instance, the homeowner could lose money if the full project cost can't be recouped when the home is sold.
Cash-Out Refinance
A cash-out refinance can make more sense than a HELOC if you want to keep things simple with one fixed-rate mortgage, ideally with a lower interest rate than your existing mortgage.
You can pay off your HELOC early, but be mindful of pre-payment fees, if any. If you have a Citizens HELOC, you're in luck as Citizens does not charge pre-payment fees. HELOCs allow you to make interest-only payments during the draw period, then transition to principal and interest payments during the repayment period.