Both home equity loans and home equity lines of credit (HELOCs) offer homeowners access to their accumulated home equity at a much cheaper price point than many alternative credit options. While credit card interest rates sit just under 24% now – a record high – and personal loan interest rates hover around 12%, qualified homeowners can secure a home equity loan with a rate of 8.38% now and a HELOC at 8.53%. That equates to significant savings each month – and over the typical 10 or 15-year repayment period home equity loans typically come with.

Still, borrowing from your home equity isn’t risk-free, either. If you fail to repay all that you’ve borrowed (with interest), you could risk losing your home in the exchange. But even if you can comfortably manage your home equity loan payments, there are some other notable risks to avoid, particularly in today’s evolving economic climate with inflation rising and interest rates being reduced. Below, we’ll break down three home equity loan risks to know going into 2025.

Start by seeing what home equity loan rate you could lock in here now.

3 home equity loan risks to know going into 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, homeowners should be aware of these risks (and take steps to avoid them):

Interest rates could rise

The hope that inflation would cool in a straight line downward – and that interest rates would follow – hasn’t played out in recent months. Inflation rose in October and again in November and now sits at 2.7%, almost a full percentage point above the Fed’s 2% goal. So waiting for a lower home equity loan rate to materialize in 2025 is risky when you can secure one close to 8% right now. 

Unlike mortgage interest rates, which are driven by a variety of factors, home equity loan rates track closely alongside the federal funds rate. So if rate cuts are paused or hiked again next year, interest rates on home equity loans could rise. And they will rise on HELOCs, which have variable interest rates that change each month. Understanding this dynamic, then, prospective borrowers can avoid this risk altogether by locking in a low home equity loan interest rate now – and refinancing it should rates fall by a considerable degree in the future.

Get started with a home equity loan online today.

Home values could change

Your home equity is calculated by deducting your current mortgage balance from your estimated home value at the time of application. But home prices can change and what your home is worth now may not be what it’s worth in six months or in December 2025. That’s a positive if your home value is on the rise as it could allow you to borrow even more money (the average home equity amount currently sits at around $320,000) but it’s a major risk if your home value drops. 

A significant value decrease could lead you to be “underwater” by owing more to the lender than your home is worth. This is particularly risky with home equity loans, which offer borrowers a lump sum of money versus a HELOC that functions as a revolving line of credit. So, before applying, make sure that your home value is secure and, preferably, on the rise.

Your debt could increase

If you use your home equity loan to pay off or to consolidate high-interest rate debt, like credit cards, then you could make strides toward boosting your financial health. But if you use it for the wrong reasons, like paying for depreciating assets such as cars or one-time expenses like weddings, you could put yourself into a growing debt spiral that will be difficult to get out of. So make sure you’re using your home equity loan for safe and effective purposes (like home repairs and renovations, which come with potential tax benefits) and avoiding using it in ways that could lead to your debt becoming harder to pay down than it already is.

The bottom line

A home equity loan offers borrowers access to a large, potentially six-figure sum of money, at an interest rate much lower than some popular alternatives. But it does come with risks that homeowners will need to navigate around, too. By being aware of these risks going into 2025 and by utilizing your funds for the most appropriate and secure reasons, you can position yourself for sustained home equity borrowing success both in the new year and in the years that follow.

Learn more about borrowing with a home equity loan here now.