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Tapping into your home equity can be a great option when you need to borrow money, but these common misconceptions may make you hesitant to do so.

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When it comes to borrowing money, homeowners have a unique tool on their hands: their home equity. If you have a large amount of equity in your home, these lending products, which include home equity loans and home equity lines of credit (HELOCs), can be a great way to borrow money with lower-than-average interest rates and enticing loan terms.

And, right now is an excellent time to consider these types of lending options. Not only does the average homeowner currently have high amounts of equity in their home, but the average interest rates for these two products are much lower than you’d get with many other types of loans. Plus, these loans typically come with a lot of flexibility, making them a smart bet for any number of uses.

But despite these potential benefits, there are some common misconceptions about HELOCs and home equity loans that can lead to fear and doubt about this type of borrowing. And if you fall for them, it can lead to missing out on the unique benefits these lending products can offer, so it’s important to clear up these misunderstandings.

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5 home equity loan misconceptions to know

If you’re considering a HELOC or home equity loan, make sure you know the truth behind these common misconceptions about home equity products.

HELOCs and home equity loans are only for major expenses

One common misconception about HELOCs and home equity loans is that they are exclusively used for big-ticket expenses, like home renovations or debt consolidation. That’s not the case, though. While these types of loans can be a good way to cover large expenses without paying the high interest rates you’d get with credit cards or other lending products, they aren’t exclusively meant for big expenses. 

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What’s unique about HELOCS and home equity loans is that these financial tools offer flexibility. You can use them for a variety of purposes, such as consolidating high-interest debt, funding you or your child’s education, covering medical expenses or even starting a business. The choice is yours, and the versatility of these loans is often underestimated.

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Home equity interest rates are unpredictably high

While interest rates can vary based on the lending institution and the economic environment, HELOCs and home equity loans often come with lower interest rates compared to unsecured loans or credit cards. 

For example, the average home equity loan has an interest rate of 8.59% as of August 29, 2023. Credit cards, on the other hand, are currently averaging the highest rates on record at well over 20%. The difference between those two rates is significant — and utilizing a HELOC or home equity loan instead of a credit card to finance a large expense right now could save you a lot in interest over the life of the loan.

Additionally, the interest rates are typically fixed for home equity loans and can be variable for HELOCs, allowing for manageable payments and potentially favorable terms. If you opt for a fixed-rate home equity loan, you’ll have consistency with your payments and your rate won’t change unless you refinance the loan.

Applying for a HELOC or home equity loan is complicated and time-consuming

The perception that obtaining a HELOC or home equity loan involves extensive paperwork and a lengthy approval process can deter homeowners from applying. However, you likely don’t have to deal with laborious amounts of paperwork during the application process. 

Lenders have actually streamlined the application process in recent years, and online applications and digitized documentation submission have made the process more convenient. Additionally, having a good credit history and equity in your home, and easily meeting other requirements, can expedite the approval process and make it easier to avoid complicated lending requirements.

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HELOCs and home equity loans lead to over-indebtedness

Concerns about accumulating excessive debt often arise when considering these options. And, while any lending product can lead to too much debt if you aren’t careful, a home equity loan or HELOC doesn’t have to be riskier than any other type of loan if used carefully.

The key to avoiding over-indebtedness is responsible usage, careful planning and a disciplined repayment plan. By setting a clear purpose for the funds, creating a budget and understanding your ability to make consistent payments, you can harness the benefits of HELOCs and home equity loans without falling into a cycle of debt.

HELOCs and home equity loans are only for financially struggling homeowners

There is a common misconception that these types of loans are meant for homeowners facing financial hardship. That simply isn’t true.

In reality, homeowners from various financial backgrounds can benefit from HELOCs and home equity loans. Whether you’re seeking to finance an investment opportunity, pay for education or enhance your property’s value, the options for how to use home equity cater to a wide range of financial goals.

The bottom line

Overall, HELOCs and home equity loans are versatile financial tools that offer homeowners the opportunity to strategically leverage their property’s equity. And, by dispelling these common misconceptions, it can help you make informed decisions about whether these home equity options align with your financial goals. Just remember, though, that like any financial decision, understanding the terms, interest rates, repayment plans and your own financial capabilities is crucial in order to navigate these options confidently and responsibly.


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