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Home Equity Loans
Pros and cons of a home equity loan
Updated Aug 26, 2026
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Key takeaways:
A home equity loan lets you borrow against the value of your home.
Home equity loans typically come with fixed interest rates that are often lower than unsecured options.
Your home is used as collateral (security) on a home equity loan. If you don't repay the loan, you could lose your home.
As a homeowner, you could build up home equity over time as you pay off your mortgage and your home goes up in value. Through a home equity loan, you could use that home equity to get the funding you need for major expenses like a home renovation or debt consolidation.
A home equity loan is a way to borrow against the equity in your home and receive a lump sum at closing. Home equity loans typically offer a fixed interest rate and a set repayment schedule.
Your home is used as collateral, which means it backs up the loan. This might help you qualify for a lower interest rate than you'd get on an unsecured loan.
But just like with other types of loans, home equity loans have some risks and considerations. One key thing is that if you don’t repay the home equity loan, you could lose your home. Learning the pros and cons of a home equity loan could help you decide whether this type of borrowing fits your financial goals.
What are the advantages of home equity loans?
Here are some of the potential benefits of home equity loans:
Lower interest rates. Home equity loans are secured by your property. That means they generally have lower interest rates than unsecured alternatives such as personal loans or credit cards.
Fixed interest rates. Locking in an interest rate when you sign up for the home equity loan means you'll know your total cost from the beginning.
Predictable payments. Home equity loans are installment loans, so you pay them off in fixed monthly payments over a set term. A schedule of regular, unchanging payments allows you to budget precisely for those fixed payments.
Larger loans. If you have a lot of equity in your home, a home equity loan may allow you to borrow more than typical limits on personal loans or credit cards. This could make a home equity loan a good choice for a large expense like a renovation or major repair.
Multiple uses. Home equity loans can be used for a wide variety of financial goals, from home improvements to debt consolidation.
Possible tax benefits. The interest you pay on home equity loans may be tax-deductible if the loan is used to substantially improve your home and boost its value. Consult a tax professional for details.
What are the disadvantages of home equity loans?
Home equity loans may offer several advantages, but it’s smart to be familiar with the potential disadvantages:
Risk of losing your home. If you don't repay the loan, the lender could have a legal claim on your home.
Higher upfront costs. Getting approved for a home equity loan might involve some extra fees and costs. These costs may include a home appraisal and closing costs that exceed the initial costs of getting other forms of credit.
Longer repayment period. Home equity loans are typically structured for repayment over five to 30 years. The longer you take to repay a loan, the more interest you typically pay.
Limited by your home equity. Lenders generally require a cushion between the value of your house and how much you can borrow against it. If you already have a big mortgage balance and haven't built up a lot of home equity, a home equity loan may not be an option.
Could end up “underwater” on your home. If you borrow against your equity and home values go down, you could end up owing more on your home than the home is worth (also called being underwater on your home). Being underwater could limit your financial options and make things more complicated if you want to sell your home.
Credit score requirements. The specific credit score you need to get a home equity loan will vary by lender, but most lenders require you to have a score of 600 or higher to qualify.
Less flexibility. Home equity loans mean borrowing the full amount upfront. This may not be the most efficient way to borrow if you're not sure of your project’s cost or you want to pay for a few different financial needs at different times.
Pros and cons of a home equity loan at a glance
A home equity loan could be a great tool for reaching your financial goals. But they work best when you know all the pros and cons from the beginning. Here's a quick look at them side by side:
Advantages | Disadvantages |
Could allow for larger loan amounts than unsecured options | Your home secures the loan and could be at risk if you don’t repay it |
Often have lower interest rates than unsecured loans or credit cards | Typically have closing costs and/or annual fees |
Typically fixed interest rates | Limited by your available home equity |
Predictable payments with fixed rates | One-time loan lacks flexibility if you need to reborrow |
Can be used for many financial goals like renovations or consolidation | Credit score and DTI requirements |
Potential tax advantage for eligible home improvements | Could end up underwater if property values go down |
How does a home equity loan compare to a HELOC?
A home equity line of credit (HELOC) could be another option if a home equity loan isn't quite right. Both a home equity loan and HELOC tap into your home equity, using your home as collateral. The main difference is how funds are accessed and repaid.
A home equity loan delivers the loan proceeds as a lump sum at closing, with predictable monthly payments over a set repayment term. Home equity loans also typically have a fixed interest rate.
A HELOC is a revolving line of credit. You can borrow, repay, and borrow again up to your credit limit during a set draw period. Then, you enter a repayment period where you can't borrow anymore and you focus on paying off your balance. Most HELOCs have variable interest rates, but some lenders, including Achieve Loans, offer fixed-rate options.
Overall, a home equity loan tends to be more predictable, while a HELOC is typically more flexible. If you may have staggered costs or a project that occurs in phases, the extra flexibility of a HELOC could be more practical than a one-time home equity loan.
When could a home equity loan make sense?
A home equity loan could be a good idea for your situation if you have built enough equity in your home, need to borrow a large amount of money, and want the stability of predictable monthly payments with a fixed interest rate.
A home equity loan could also be worth considering if you want to consolidate high-interest debt, make home improvements that could qualify for tax benefits, or cover another major expense that you need years to pay off.
Before you borrow, make sure you’re comfortable using your home as collateral and that your repayment plan fits your budget.
How much can you borrow with a home equity loan?
The biggest factor in how much you can borrow with a home equity loan is how much total equity you have in it. Lenders use a ratio called the combined loan-to-value (CLTV) to compare your home's value versus how much you owe against it—including the new home equity loan.
Most lenders require you to keep some equity in your home after taking out the loan. Many cap the CLTV at 80% to 90%, though some lenders may have higher or lower CLTV caps.
As an example, if your home is worth $300,000, you owe $200,000 on your mortgage, and you want a $25,000 home equity loan, your CLTV would be:
$200,000 + $25,000 = $225,000
$225,000 / $300,000 = 0.75 = 75%
While CLTV can set your maximum, how much you're actually approved to borrow also depends on your credit history, income, and existing debts. To estimate how much you might be able to borrow, learn more about how lenders calculate home equity loan limits.
Comparisons to home equity loan alternatives
Before choosing a home equity loan, consider how it compares with other ways to borrow. Each option has different costs, risks, and repayment terms:
HELOC: A HELOC gives you access to a revolving line of credit. You'll likely receive a similar interest rate as a home equity loan, but with more flexibility since you can reuse the credit line as you repay it during the draw period.
Cash-out refinance: A cash-out refinance replaces your existing mortgage with a new, larger loan. You pay off your existing mortgage and keep the extra as cash. It may be a good option if you can get a lower rate than your current mortgage.
Personal loan: A personal loan may have lower upfront costs and doesn’t use your home as collateral. It could come with a higher interest rate than secured options.
Home equity loans can be a cost-effective way to borrow money under the right circumstances. Consider the pros and cons and possible alternatives carefully to make sure a home equity loan is the best solution for your situation.
If you’re interested in accessing your home equity, Achieve Loans can help you explore your options.
Author Information
Written by
Richard Barrington is a contributing writer for Bills.
Reviewed by
Ben Gran is a personal finance writer with years of experience in banking, investing and financial services. In addition to Achieve, Ben has written for Business Insider, The Motley Fool, Forbes Advisor, Prudential, Lending Tree, fintech companies, and regional banks like First Horizon. He is a graduate of Rice University.
Frequently asked questions about home equity loan pros and cons
A home equity loan could offer a lower interest rate than unsecured options like personal loans or credit cards, since your home is used as collateral (security). A fixed interest rate and set monthly payments could make it easier to plan around repayment. If you have enough home equity and good enough credit to qualify, a home equity loan might allow you to borrow more than some unsecured loans.
A home equity loan uses your home as collateral, which means you could lose your home if you don’t repay the loan as agreed. Other potential drawbacks include upfront costs, qualification requirements, and the possibility of owing more than your home is worth if property values decline. A home equity loan also provides the full loan amount as a one-time loan, which could be less flexible and a line of credit if your borrowing needs change over time.
A home equity loan and a HELOC both allow you to borrow against your home equity. A home equity loan is generally more predictable. It provides a set amount of money upfront and typically has a fixed interest rate and fixed monthly payments.
A HELOC is typically more flexible. It is a revolving line of credit, meaning you can borrow, repay, and borrow again up to your credit limit during the draw period. Most HELOCs have variable interest rates, though some lenders, including Achieve Loans, offer fixed-rate options.
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