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So, here's what happened last Tuesday. While I'm sitting at my desk trying to finish my MSW homework, my phone rings. My neighbor texted me to ask if I know anything about this equity stuff because a contractor told her it would cost $47,000 to remodel her kitchen. She wanted to pay in cash, but of course she didn't have any on hand.
This kind of talk happens more often than you might think. People know they own part of their home, but they don't know what to do with that ownership. And to be honest, the mortgage business hasn't always made things clear.
Let’s break this down.
Home equity is just the part of your home that you really own. To figure it out, take the current market value of your home and subtract the amount you still owe on your mortgage.
This is a real example from a real client.
Value of the home: $320,000
The remaining balance on the mortgage is $185,000.
Home equity is $135,000, which is 42% of the value of the home.
That $135,000 is real wealth that you've built up over time by making monthly payments and the value of your home going up. The Federal Housing Finance Agency says that home prices in the U.S. went up by 6.3% from the second quarter of 2023 to the second quarter of 2024. This means that many homeowners gained equity without doing anything other than making their regular mortgage payments (FHFA House Price Index, Q2 2024).
Picture it like this. Equity is the part of your home that you really own. Until you pay off the mortgage in full, your lender owns the rest. Every month that you make a payment, your share grows and the lender's share shrinks.
Your mortgage payment is made up of two parts: the principal and the interest. During the first few years of your mortgage, most of your payment goes toward interest, and a smaller amount goes toward paying down your principal. Amortization is the name of this process.
Let me show you a real-life example using rates from 2025.
Amount of the loan: $300,000
Fixed interest rate of 6.875% for 30 years
Monthly payment: $1,973 for the principal and interest only
Breakdown for Month 1:
Breakdown for Month 60:
See how you're paying more toward the principal each month after five years? Around year 15, you'd be paying about the same amount toward principal and interest. Most of your payments go straight to the principal by year 25.
There are many things that can make your home worth more, and in 2025 we're seeing some interesting differences between regions. According to the National Association of Realtors (NAR), the median price of existing homes sold in August 2024 was $416,700, which was a 3.1% increase from the previous year (NAR, September 2024).
There are big differences between regions. In 2024, markets in the South, like Austin and Nashville, have gone up by 4 to 7%. Markets in the Midwest are growing at a steady rate of 2% to 4%. Some coastal markets have cooled off, with growth rates staying the same or going up by 1%. Emerging markets like Boise and Raleigh-Durham are seeing prices go up by 5% to 8%.
Here's how appreciation builds equity.
Price in 2020: $280,000
Down payment of 10% in 2020: $28,000
Initial investment: $28,000
If the value goes up 5% a year, it will be worth $357,381 in 2025.
The mortgage balance with payments in 2025 is $246,800.
Total equity in 2025: $110,581
You've made $82,581 in equity on top of your down payment just by making regular payments and the value of your home going up.
Renovations can increase equity, but not always by the same amount of money. The 2024 Cost vs. Value Report from Remodeling Magazine says that the national average return on investment is very different from one area to another. If you spend $28,000 on a small kitchen remodel, you can expect to get back about $24,000 in value. Bathroom additions have a 62.3% return on investment. Major kitchen renovations have a 53.9% return on investment. Bathroom remodels that cost a lot of money show a 67.2% return on investment. According to Remodeling Magazine's 2024 Cost vs. Value Report, replacing a garage door has a return on investment of 102.7%, which is one of the few improvements that goes over 100%.
Last month, a client spent $18,500 to remodel her bathroom. Three months later, when she refinanced, her home's value went up by $12,400. The answer in the book is that improvements always add value, but it really depends on the price ceiling in your neighborhood and whether the renovation meets local buyers' expectations.
Let me show you the exact way I figure things out for my clients. You need to know two things: how much your home is worth on the market right now and how much you still owe on your mortgage.
Check your online mortgage account or call your lender. Check for the principal balance or the current balance. Don't mix this up with the amount of your original loan because you've been paying it off.
$198,650 is the balance on this mortgage.
You have a few choices here.
Online estimation tools like Zillow's Zestimate and Redfin's estimate give you a rough idea of how much something is worth, but they can be off by 5% to 10% in either direction. The algorithm doesn't do a good job of capturing recent luxury renovations, so I've seen Zestimates be off by $40,000.
A local real estate agent's Comparative Market Analysis (CMA) gives you more accurate information. They will look at 3 to 6 homes that are similar to yours in size, age, condition, and location that have sold recently.
In 2025, professional appraisals will cost $400 to $600 and give the most accurate value. For most equity products, lenders need this anyway.
You can also look up recent sales of similar properties on your own. Find three to five homes that fit these criteria: they are within 0.5 miles of your property, have a square footage that is within 15% of yours, have the same number of bedrooms and bathrooms, were sold in the last three to six months, and are in the same condition and age.
For example, you might find these comps:
Your house has three bedrooms, two bathrooms, and 1,875 square feet.
Value: $365,000, which is about the middle of the range
Value of the house: $365,000
The balance on the mortgage is $198,650.
The value of your home is $166,350.
To find the equity percentage, divide $166,350 by $365,000 and multiply by 100. This gives you 45.6%.
This percentage is important because most lenders want you to keep 15–20% equity, which is an 80–85% loan-to-value ratio, after you borrow money. Depending on the lender and the product, you could get between $93,350 and $110,650 in this case.
Appraisals are often lower than what you see online. We learned about confirmation bias in my MSW program. This is when people think their home is worth more than it really is because they are emotionally attached to it. I do this as well. I remember every weekend and midnight painting session that made my house better, so I think it's worth more than it probably is.
Last year, when I refinanced, my Zestimate said $342,000, but the appraisal said $318,000. That $24,000 difference made a big difference in how much I could borrow.
I won't lie, the choices can be a lot to take in. I'll explain each one with real numbers and when each one makes sense.
A cash-out refinance gives you a new, bigger loan to pay off your current mortgage. You get the difference in cash.
This is how it works in real life.
The current mortgage balance is $175,000 at 3.5%, which was taken out in 2020.
Value of the home now: $320,000
Equity right now: $145,000
The new loan amount is $240,000 at 6.75% based on rates in 2025.
At closing, you'll get about $240,000 minus $175,000 and $8,400 in closing costs. That comes to $56,600.
Change in monthly payment:
When this is clear:
When to stay away:
This is what the market will look like in 2025. As of October 2025, mortgage rates are between 6.5% and 7.25%. Cash-out refinancing only makes sense if your current rate is higher than 7% or you really need to combine high-interest debt. The average 30-year fixed rate for the week ending October 10, 2025, was 6.87%, according to Freddie Mac's Primary Mortgage Market Survey.
A home equity loan is a second mortgage that doesn't pay off your first one. You get a lump sum and pay it back over a set period of time, usually 10 to 15 years in 2025, with a set interest rate.
This is how it works in real life.
Current first mortgage: $185,000 at 3.25%
The value of the home is $300,000.
The most you can borrow is $255,000, which is $300,000 times 0.85.
Maximum loan amount: $255,000 minus $185,000 equals $70,000.
The real loan amount is $50,000 at 8.25% for 15 years.
How to figure out your monthly payment:
The total interest paid over the life of the loan is $37,120.
When this makes sense:
When to stay away:
As of 2025, AmeriSave will offer home equity loans for both primary and secondary homes. Depending on your credit score, loan-to-value ratio, and state, rates in October 2025 will usually be between 7.75% and 9.50%. Last week, a client with a 760 credit score and 60% combined LTV was able to get a loan at 7.85%.
Your home secures a HELOC, which works like a credit card. You can borrow money up to a certain amount and then pay it back over a period of time, which is usually 10 years. You only have to pay interest on the money you borrow.
This is how it works in real life.
Value of the house: $380,000
The balance on the first mortgage is $215,000.
To find the HELOC credit limit, take $380,000 times 0.85 and then subtract $215,000. This gives you $108,000.
First draw: $25,000 for repairs to the house
As of October 2025, the variable rate is 9.50%, which is Prime plus 1.50%.
Draw period for years 1 to 10:
Repayment time for years 11 to 20:
This is what the 2025 rate reality is. The prime rate was 8.00% as of October 2025, and the Federal Reserve kept rates steady for most of 2024 and into 2025. Most people who borrow money see rates between 9% and 11% (Federal Reserve, 2025). This is because HELOC rates are usually 1% to 3% higher than prime.
When this makes sense:
When to stay away from:
AmeriSave doesn't currently offer HELOCs, which is an important limitation. We're thinking about adding this product in 2025–2026. A lot of our clients get HELOCs from local credit unions or regional banks and then come back to us for other mortgage needs.
A reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), lets homeowners 62 and older turn their equity into cash without having to make monthly payments on their mortgage. You pay back the loan when you sell, move out for good, or die.
This is how it works with a real-life example.
The house is worth $425,000.
Current mortgage: $0 because it's paid off.
Age of the borrower: 68
The maximum amount you can borrow is about $234,750, which is 55% of the value of the home and changes with age.
Costs up front range from $17,000 to $21,000, which includes FHA insurance, origination fees, and closing costs.
You can get this as a lump sum at closing, as a line of credit that you can use as needed and that grows over time, as monthly payments as fixed income, or as a combination of the two.
Paying back the loan: No monthly payments are needed. When you sell your house, move out for 12 months in a row, or die, the loan is due. Heirs can either pay off the loan and keep the house or sell the house and keep the equity they have left over.
When this makes sense:
When to stay away:
Important to think about in 2025: Reverse mortgages have high upfront costs (2% to 5% of home value) and complicated terms. Before moving forward, the Consumer Financial Protection Bureau strongly suggests getting counseling (CFPB, 2024). These loans also cut down on what you leave to your heirs.
AmeriSave does not offer reverse mortgages. If you're interested in this, I suggest talking to a HUD-approved reverse mortgage counselor first to find out if it's really the best choice for you.
You can use home equity funds in a lot of different ways, but some ways are better for your money than others. Based on hundreds of client situations, this is what I think you should do.
This is one of the best ways to use home equity because the interest rate difference is so big.
Last month, a real client example.
Balances on credit cards:
After combining with a $30,000 home equity loan at 8.25% for 10 years:
The savings are real, but there is a very important warning here. If you combine your credit cards and then use them again, you've made your problem twice as bad. Three years ago, a client did just that. He used equity to pay off $31,000 in credit cards, but in two years he racked up another $28,000 in card debt. Don't do that.
Tax tip: If you use the money from a home equity loan to make major improvements to your home, the interest on the loan may be tax-deductible. Most of the time, you can't deduct the interest on credit card debt consolidation (IRS Publication 936, 2024).
Renovations that are planned out can make your home worth more and make your life better.
The kitchen remodels that cost $28,000 and add $24,000 in value for an 85.7% ROI are good projects for 2025. Adding a bathroom costs $72,000 and adds $45,000 in value, which is a 62.3% return on investment. Adding a wooden deck costs $18,500 and adds $11,000 in value, giving you a 59.5% return on investment. Replacing windows with vinyl costs $19,500 and adds $12,000 in value, which is a 61.5% return on investment. The cost of replacing the garage door is $4,200, and the value added is $4,300, which is a 102.7% return on investment.
A couple took out a $65,000 loan against their home equity to remodel their kitchen and main bathroom. The appraisal came in $52,000 higher than it had been before the renovation when they refinanced two years later. They got back 80% of their money right away in the value of their home, and they also get to enjoy the upgrades.
Don't do projects like building a swimming pool, making too many changes to your home, or making it too nice for your neighborhood. A client put in a $95,000 pool in a neighborhood where most homes sold for between $275,000 and $310,000. The pool may have added $15,000 to the sale price when she sold it four years later.
Home equity loans may have lower rates than Parent PLUS loans, but there are big trade-offs.
This is a comparison using rates from 2025.
The Federal Parent PLUS Loan:
Loan Against Your Home:
When equity is a good idea for education:
When to keep your student loans:
I used a small HELOC to help pay for my MSW tuition because my program is only two years long and I'm working full-time. But I wouldn't suggest this for a four-year degree because the future is less certain.
Using home equity to pay for a business is risky, but it can get you better rates than a business loan.
This is a comparison.
SBA Loan or Small Business Administration Loan:
Home Equity:
A client borrowed $75,000 against her equity to grow her catering business. This was a success story. In three years, the business's annual revenue went from $180,000 to $520,000. She paid off the equity loan in four years and still has a business that makes money.
A client borrowed $125,000 to open a restaurant, which is a failure story. It shut down after 18 months. He still owes $112,000 on the home equity loan and had to get a second job to keep from losing his house.
This is what I think you should do. If you have a proven business model and are expanding rather than starting from scratch, you should only use equity to fund your business. You need to save up a year's worth of operating costs. You can still make the payment even if your business's income drops by half. You have talked to an accountant or business advisor.
Medical debt can ruin your finances. Home equity is a better choice than medical payment plans because it has a lower rate.
This is how typical medical financing works compared to home equity.
Plan for paying for hospital care:
CareCredit and other medical credit cards:
Loan on your home equity:
A real-life example: A client had to pay $87,000 in medical bills after a bad accident. Most of the costs were covered by insurance, but the out-of-pocket maximums and services that weren't covered added up. If you take 12% over five years, the hospital will give you $1,938 a month. She used home equity with an interest rate of 8.5% over 15 years, which cost her $855 a month. The longer term and lower rate made it possible for her to handle it while she was recovering and working less.
Tax tip: In some cases, you may be able to deduct the interest on your medical bills. Talk to a tax professional (IRS Topic 502).
A HELOC can be a backup plan in case of an emergency, but it's not the best choice for everyone.
To do this, get a HELOC for between $50,000 and $100,000. Only use it when you really need to. Pay the $0 to $50 yearly maintenance fee, which varies by lender. You can get to it right away if you have an emergency like losing your job, needing urgent repairs, or having a medical emergency.
Benefits:
Cons:
Most people would be better off with high-yield savings accounts that have $10,000 to $20,000 in cash on hand. Roth IRA where you can take out money without having to pay a penalty. A regular emergency fund that covers three to six months' worth of expenses.
I have a $25,000 HELOC that I haven't used yet. It's there in case something terrible happens. But I also have $18,000 in cash savings that I can use as my first line of defense. The HELOC is the second level of backup.
If done carefully, using equity to buy more real estate can help you build your wealth.
Example plan:
Available primary home equity: $180,000
Take out $60,000 in equity through a cash-out refinance.
Use as a down payment: $60,000 is 20% of $300,000 worth of rental property.
Numbers for rental properties:
Analysis: The property's monthly cash flow is slightly negative, but the rent covers most of the costs. Rent increases over time should make this better. While this is going on, tenants are paying down the mortgage on the rental property, which builds equity in the property. You already own your main home.
Important risks:
When this is true:
Most people build equity slowly by making regular mortgage payments and the value of their home going up over time. But here are some tried-and-true ways to speed things up.
Even small extra payments can cut your loan term and interest paid by a lot.
Here’s an example of a 30-year mortgage with a 6.875% interest rate on a $250,000 loan.
Standard payment plan:
With an extra $200 in principal each month:
To do this right, check with your lender to make sure they don't charge you a fee for extra principal payments. Most do. When making an extra payment, be sure to specify that it goes to the principal. Check your next statement to make sure that the principal balance went down by the full extra amount. Even if the amounts are small, make extra payments on a regular basis.
Every month, I put $150 toward my mortgage. I don't have to think about it because it's automatic. This will save me more than $62,000 in interest over the 30-year term and cut my loan time by 6.5 years.
This plan gives you 13 full payments a year instead of 12.
Schedule for monthly payments:
Schedule for payments every two weeks:
The payoff on a $250,000 loan at 6.875% is 307 months instead of 360 months. Saved 4.4 years. $68,430 in interest saved.
Important: Check that your lender really does offer biweekly payment plans. Some charge processing fees or setup fees of $300 to $500. Some people hold your first payment until the second one comes, which defeats the purpose. You can set up autopay at AmeriSave to make half-payments twice a month, which gets the same result without any fees.
Refinancing from a 30-year mortgage to a 15-year or 20-year mortgage builds equity much faster if you can afford higher payments.
Using 2025 rates to compare:
Current loan: $225,000 left to pay off in 24 years on a 30-year loan at 3.5%.
Option 1 is to refinance for 15 years at 6.25%:
Verdict in 2025: If your rate goes up a lot, even if the term is shorter, it usually doesn't make sense to refinance. Paying extra on the principal of an existing loan is better.
Option 2 is to keep the current loan and add $913 to the principal each month.
This is the human side of it. If you refinance to a shorter term, you'll have to make higher payments. You have more options with extra principal payments because you can stop them for a while if you need to. I chose the flexible route because I have two kids, aging parents, and life happens.
Tax refunds, bonuses, inheritances, and other unexpected money can help you pay off a lot of your mortgage.
This is how a $8,000 bonus was added to the principal.
With a balance of $200,000 at 6.5%:
My plan is to put half of any unexpected money toward my mortgage and save the other half for things like an emergency fund, retirement, or my kids' education. This balances paying off debt with other important financial goals.
I got an unexpected $12,000 bonus for finishing a project last year. I put $6,000 toward my mortgage principal, $3,000 into my kids' 529 plans, and $3,000 into a fund for a family vacation. The mortgage payment brought my balance down enough to get rid of PMI three months later, which saved me $147 a month or $1,764 a year.
If the market is strong, just holding on to your property will increase its value.
Common situations for appreciation:
Austin, Texas, for example, had strong growth markets from 2020 to 2024, with property values going up by 8% to 12% each year. Boise, Idaho, has an annual growth rate of 9% to 14%. Nashville, TN, grows by 7% to 11% each year.
Moderate markets from 2020 to 2024 show that cities in the Midwest will see their property values go up by 4% to 6% each year. Indianapolis, IN, has seen prices go up 3% to 5% every year. Cincinnati, Ohio, sees an annual rise of 3% to 6%.
Markets that are getting slower or worse from 2022 to 2024 include San Francisco, CA, which has seen annual appreciation of -2% to +1%. Portland, OR, has an annual increase of 0% to 3%. Some Florida markets change depending on storms and insurance.
If you bought a $350,000 home in a moderate market that went up 4% a year, you'd make $14,000 in equity in the first year. Cumulative gain of $75,663 after five years. A total gain of $168,492 over ten years.
This is passive equity building, which means you don't have to do anything but keep up with your mortgage and take care of your property. It's strong, but it's not a sure thing.
Most analysts think that home prices will go up by 2% to 4% nationally from 2025 to 2026, but there will be differences between regions. Markets with a lot of new jobs and not a lot of housing should do better (Fannie Mae, 2025 Housing Forecast).
Not all the time. Please let me give you the honest answer and not just what the mortgage industry says.
When it makes sense to use home equity
When you want to pay off high-interest debt and have a plan to avoid getting into more debt, you should think about home equity. When you can afford to pay back home improvements that will give you a return on your investment. When you have a specific bill to pay, like medical bills or school costs, and there is no better way to pay for it. If your first mortgage rate is very low, like below 5%, and you don't want to lose it by refinancing. When your income is steady and you can easily make the extra payment. When you are strict about treating your home as an investment instead of an ATM.
When you should never use your home equity
Don't use equity to pay for vacations, expensive things, or lifestyle creep because your home shouldn't pay for things you don't need. When you can't make a clear plan for how to pay back the money because hope isn't a plan. When you can't keep your job or make money because losing your home is worse than having debt. When you're already having trouble making your mortgage payments, taking on more debt won't help. If you're going to sell in the next two to three years, you should think about how much it will cost and how the market might change. When you're thinking about investing in risky things like cryptocurrency, penny stocks, or business ideas that haven't been proven yet. When you haven't dealt with the root of your spending problems because you don't want to make more debt.
Risk 1 is losing your home if you can't pay. All equity products, except reverse mortgages, require payments. If you don't make your payments, you could lose your home. I've seen this happen twice in my career, and it's awful. One of my clients lost her home after 19 years because she couldn't keep up with her first mortgage and HELOC payments after losing her job.
If the market drops, Risk 2 is underwater. If you borrow a lot against your equity and home values go down, you could end up owing more than your home is worth. During the housing crisis from 2008 to 2012, this happened to millions of Americans. It is almost impossible to sell or refinance a home worth $230,000 if you owe $280,000 on it.
Risk 3 is being able to retire safely. Using equity now will make you less wealthy when you retire. You could have used that $50,000 you borrowed today to downsize or get a reverse mortgage later. A 62-year-old client told me recently that she wishes she hadn't used $75,000 in equity to fix up her kitchen when she was 54. That money would really help her now that she has to pay for expensive medical care on a fixed income.
Risk 4 is when rates go up and down. The prime rate affects the rates on HELOCs. Your payment can go up a lot if the Federal Reserve raises rates, which they did a lot in 2022–2023. As rates went up, a client's HELOC payment went from $340 a month to $625 a month in 18 months.
Risk 5 is having less financial freedom. A second payment makes it harder for you to pay your bills each month. This can make it harder to deal with unexpected costs, save for retirement, or take advantage of chances.
Here's the deal: Your home equity is money you've made. It stands for years of paying off a mortgage, the value of the home going up, and being a responsible homeowner. You already own an asset that has real money in it, sometimes six figures of real money.
It's hard to resist the urge to use that money. I understand. I know how you feel because I've looked at my own equity statement and thought about all the things we could do with that money. Buying new cars, going on vacation, fixing up the house, paying off debt, and investing. There seem to be endless options.
But here's what I've learned from watching hundreds of homeowners make decisions about their equity. The people who do well are those who are patient, plan ahead, and are honest with themselves about how well they stick to their budget. They use equity to pay for things like medical bills, real emergencies, and investments like education, home improvements that add value, or business growth. Never for everyday use.
People who have trouble treat their homes like ATMs. They borrow money for things they want instead of things they need. They don't deal with the real problems with spending. They think that every day will be better than the last.
The 65-year-old version of you who is looking forward to retirement is counting on you to make good choices now. That person in the future needs the money you're making now in this house.
Before you tap into your equity, ask yourself if you really need it or just want it. Will this help my money situation in five years? Can I afford this payment even if something goes wrong? Am I fixing a problem or paying for a way of life? Would my 65-year-old self be grateful for this choice?
If the answers feel right, go ahead with confidence. If they don't, you might want to wait, save up, or find another way.
Your house is more than just a piece of property. It's your family's safety, the foundation for your retirement, and your safety net. Give it the respect it needs.
And keep in mind that you're making the best choice you can with the information you have right now, no matter what you decide about home equity. That's all we can do.
I've seen these mistakes happen too often. Don't make the same mistakes as others; learn from them.
Mistake #1: Using equity to buy things that lose value
Buying things that lose value is the worst way to use home equity.
A couple borrowed $35,000 through a HELOC to buy a boat. They sold the boat three years later for $19,000. They still had to pay back $28,000 on the HELOC. They paid $9,000 in cash to get rid of the debt, and they had also paid three years' worth of interest. They spent about $18,000 to own the boat for three years and lost $35,000 in home equity.
I've also seen bad uses, like spending $22,000 on a trip to Europe. Memories are great, but still. $40,000 for betting on cryptocurrencies, but they lost most of it. You could have gotten a car for $15,000 and paid for it with a loan at a similar or better rate. $8,000 for electronics and furniture.
If the item will be worth less than half its value in five years, don't use home equity to buy it.
Mistake #2: Not looking for the best rates
A client of ours recently told me that she took the first home equity offer she got without looking at other options. She got 9.75% when she could have gotten 8.25% somewhere else. That's a difference of $118 a month or $21,240 over the life of the loan on a $60,000 loan over 15 years.
Always ask your current mortgage lender for quotes because they may give you a discount for being a good customer. Get quotes from at least two or three other banks. Look into local credit unions because they often have good rates. Look into lenders online.
Look at more than just the rate. Check out the fees and closing costs. Check the points charged. Look over the application fees. Check out the yearly fees for HELOCs. Look into penalties for paying early. Look at the different rate lock periods.
When I got my home equity loan, I probably spent six hours getting quotes. It was boring, but I saved $8,700 over the life of the loan by getting a rate that was 0.6% lower than my first quote.
Mistake #3: Taking Out the Most Money You Can
You shouldn't borrow $100,000 just because you can.
Conservative borrowing strategy: Figure out exactly what you need. Add 10% to the buffer for emergencies. Stop there, even if you can get more.
Estimate for kitchen renovation: $42,000. Put in a 10% buffer of $4,200. Get a loan for $46,000. Approved for $85,000. The smart thing to do is to only borrow $46,000.
Why? Payments every month that are lower. Less interest to pay. Pay off faster. Keeps more equity for future needs. If things change, it lowers the risk of foreclosure.
A client didn't listen to this advice and borrowed $75,000 when she only needed $45,000 to fix up her house. When I talked to her a year later, she couldn't even remember what she had spent the extra $30,000 on. Now she's paying for money she basically threw away.
Mistake #4: Not paying attention to closing costs
Closing costs for home equity loans and cash-out refinances are about the same as those for your original mortgage. They are usually between 2% and 5% of the loan amount.
For a $50,000 home equity loan, the closing costs could be between $500 and $650 for the appraisal. The origination fee is between $500 and $1,000, or 1% of the loan amount. $400 to $800 for title search and insurance. A credit report costs between $30 and $50. Fees for recording range from $125 to $200. The cost of hiring a lawyer ranges from $300 to $600, depending on the state. The usual amount is between $1,855 and $3,300.
That's 3.7% to 6.6% of your loan amount on a $50,000 loan. You can only use $46,700 to $48,145 of the money you get.
What are the total closing costs in dollars? Is it possible to include costs in the loan? Common, but it raises the amount borrowed. Are there credits available from lenders? Higher rate in exchange for lower or no closing costs. Can I look for title insurance and other services?
Some lenders advertise HELOCs with no closing costs, but be careful because they often charge higher interest rates or annual fees that add up to more than the closing costs over time.
Mistake #5: Using Your Home Like an ATM
I've seen clients fall into a bad habit. Tap into your equity, pay off your debt, get more debt, tap into your equity again, and so on. This is known as serial refinancing, and it is bad for your finances.
This is how the cycle goes. You owe $30,000 on your credit cards. You pay it off with a cash-out refinance. For six months, you feel better. You slowly build up credit card debt again. You now have $35,000 in new credit card debt two years later. You tap equity one more time. You keep doing it until there is no equity left.
A real-life example: A client went through this cycle three times in 12 years. She used the equity in her home to pay off about $110,000 in credit card debt. She also spent about $80,000 on interest and closing costs for those refinances. During that time, the value of her home went up by $125,000, but she only has $15,000 in equity to show for it instead of $140,000. She is 58 years old and has very little money saved for retirement and very little equity in her home.
This is how to fix it. You have to change the way you spend money if you want to pay off debt with equity. If not, you're just putting off financial disaster.
Mistake #6: Not Having a Backup Plan
What do you do if you lose your job, get sick, or have to pay for something you didn't expect? Are you still able to pay your home equity payments?
Client story: They took out a $65,000 HELOC with a $540 monthly payment. They let me go six months later. Unemployment benefits paid for basic living costs, but not the HELOC payment. Started missing payments after being unemployed for three months. Your credit score went down. I finally got a new job, but the damage was done because late payments stayed on my credit report for seven years.
An emergency fund that covers three to six months of all housing payments, including the mortgage and equity loan, is an important part of a backup plan. Disability insurance or income protection insurance. A clear plan for how you would pay if your income dropped by half. You could get help from family or money if you needed it.
Do this stress test before you tap into your equity. If my family's income dropped by half tomorrow, would I still be able to pay all of my bills for six months? If the answer is no, either borrow less money or save more money for emergencies first.
Mistake #7: Not Reading the Small Print
Yes, it is boring. Yes, it is more than 40 pages of legalese. You still need to read it.
Important parts to look over are the prepayment penalties, which are usually on pages 8 to 12. HELOCs have variable rate adjustment terms that say how often, how much, and what indexes. How to handle defaults and foreclosures. What kind of insurance you need. Fees, such as yearly fees, transaction fees, and inactivity fees. You have the right to cancel, including a three-day right of rescission.
A client signed a HELOC without reading that it had a $95 annual fee, a $15 fee for each check over $1,000, and a $250 fee for closing it early if it was done within 3 years. In the first year, these fees cost her an extra $645.
Another client didn't realize that his HELOC had a starting rate of 4.99% for six months, then changed to prime plus 3%, which was 11% total. His monthly payment went from $210 to $458. He thought he had locked in the lower price.
If you don't understand something, ask questions. A real lender will make the terms clear. If they hurry you or seem annoyed by your questions, that's a bad sign.
The mortgage and housing markets are still changing. Here's how getting to your home equity will be different in 2025 than it is now.
Rates are higher now than they were in 2020 and 2021. To fight inflation, the Federal Reserve raised rates a lot in 2022–2023, and rates have stayed high through 2025.
Effect on your choices: If you locked in a mortgage rate below 4% between 2020 and 2021, cash-out refinancing in 2025 with rates between 6.5% and 7.25% probably doesn't make sense mathematically unless you have a good reason. You would be trading a 3.25% mortgage for a 6.875% mortgage, which would make your borrowing costs go up a lot.
Better option: Keep your first mortgage with a low interest rate and get a home equity loan or HELOC as a second mortgage. Yes, the home equity product will have a higher rate, between 8% and 10%, but you will keep your low-rate primary mortgage.
Option 1 is a cash-out refinance:
Option 2 is to keep your first mortgage and get a home equity loan:
Even though option 1 has a higher interest rate on the home equity loan, option 2 saves you about $50,940 in interest over 15 years.
After seeing what happened in past housing cycles, lenders are now more cautious about debt-to-income ratios and loan-to-value limits.
The current standard for 2025 is a maximum debt-to-income ratio of 43% to 45%, which is lower than the 50% or higher ratio that was common in the mid-2000s. The maximum loan-to-value ratio is now 80% to 85%, down from 95% to 100% in the mid-2000s. Minimum credit scores of 620 to 640, compared to subprime lending in the middle of the 2000s. Income documentation that needs full verification instead of stated income or liar loans from the mid-2000s.
This means that you will need better financial qualifications than borrowers did 15 to 20 years ago. This is actually a good thing because it keeps you from borrowing too much and lowers the risk of foreclosure.
It's hard to do appraisals in 2025 because home prices have changed so quickly in the past few years and market conditions are different in each region.
One common problem is that Zillow and Redfin's online estimates often overstate value by 5% to 15% in markets that are cooling down. There aren't many sales that are similar in areas that are quickly rising in value. Changes made to account for differences in the condition of the properties. Appraisers tend to favor recent refinance values over current market values.
In the last 18 months, three appraisals have come in 7% to 12% lower than Zillow's estimate. Zillow said one client's home was worth $445,000, but an appraiser said it was worth $392,000. That $53,000 difference made a big difference in how much he could borrow.
If the appraisal comes in low, one option is to give the appraiser comparable sales data to think about again. Pay for a second appraisal, which costs $400 to $600 but might be worth it. If the market is getting better, wait 6 to 12 months and try again. Make changes that add value and then apply again.
A lot of lenders now offer hybrid or fully digital closing processes for equity products, but the rules are different in each state.
As of 2025, you can choose from electronic notarization, or eNotary, which is available in 40 or more states. Remote online notarization (RON) is available in 45 or more states. Hybrid closing: you look over the documents online and then sign them in person. The old-fashioned way of closing, where everything is done in person, is still required in some states.
AmeriSave offers digital options where they are allowed by law. These can speed up the closing process by 3 to 5 days and make it more convenient. But some title companies and states still need closings to happen in person.
Ten years ago, no one talked about this, but it is becoming more and more important. Climate risk that affects property values and the ability to get insurance.
New problems are arising, such as coastal properties having to pay more for insurance and having fewer options. Insurance companies are not renewing policies in areas that are likely to have wildfires. Flood zones are getting bigger, which is affecting more properties. In some areas, premiums are going up because of damage from wind and hail.
Why this is important for home equity: Property values can drop quickly if insurance becomes hard to find or too expensive. In 2020, a friend in Florida paid $2,400 a year for homeowners insurance. By 2024, that amount had gone up to $9,800 a year, plus a $15,000 hurricane deductible. She can't sell because buyers can't find cheap insurance either. Because of problems with her insurance, the value of her home went down by about 18%.
Think about these things before you borrow a lot of money against your equity. Are the climate risks in your area getting worse? Are the costs of insurance going up a lot? Could being able to get insurance affect the value of your home in the future? Do you have a steady way to get homeowners insurance?
It might sound crazy, but I've seen real effects on my finances. When you decide how much equity to tap, think about your long-term goals.
I work here, so I'm obviously biased, but I want to tell you what we can and can't do so you can make an informed choice.
We started offering home equity loans for primary and secondary homes in 2024–2025. Rates are currently between 7.75% and 9.5%, depending on credit and LTV. We can usually close in 25 to 35 days.
Cash-out refinancing is what we do best. We do thousands of cash-out refinances every year at low rates and with simple processes. We make this process easy if you need cash and are refinancing anyway.
Digital Tools: We have calculators, educational content, and online application processes that help you understand your options and apply from home.
Our team takes the time to explain your options and help you understand how your choices will affect you in the long run. We don't want to give you the biggest loan; we want to help you find the best solution.
HELOCs: We don't have any HELOCs right now. If you need a line of credit, check with local credit unions because they usually have the best rates and terms. Look into regional banks. Look at national banks where you already do business.
We do not sell reverse mortgages. If you're 62 or older and want to know more, you can talk to HUD-approved reverse mortgage counselors at hud.gov. Look into lenders that only do reverse mortgages. Talk to financial advisors who only charge fees, not commissions.
Non-Owner Occupied Investment Properties: Our home equity loans can only be used for primary and secondary homes. If you want to invest in real estate, look into portfolio lenders or commercial lenders.
Here's how to use your home equity if you're thinking about it:
First, use the methods I talked about earlier to figure out how much equity you have. Second, be clear about the dollar amounts you need to figure out what you really need. Third, check your budget to make sure you can afford the monthly payment. Fourth, check your credit score. You can get free reports at annualcreditreport.com. Fifth, get together documents like recent pay stubs, tax returns, your current mortgage statement, and your homeowners insurance. Sixth, get quotes from several lenders, such as AmeriSave. Seventh, look at the total costs, not just the interest rates. Eighth, ask questions about anything you don't understand. Ninth, base your choice on facts and how it will affect you in the long run.
Are you ready to look into your options? Go to AmeriSave's home equity loan page to see the most up-to-date info and start your application. You don't have to move forward because you can get information and quotes without making a commitment.
Or, to be honest, it's okay if a home equity loan isn't right for you. I would rather you make the right choice for your situation than try to get you to buy something that doesn't fit. Your home is your most valuable asset, so make smart choices to keep it safe.
Final Thoughts: Your Home Equity is Powerful, Use It Wisely
Let me close with some real talk. I've got my kids soccer game in an hour and I just got off a call with a client who's rethinking his equity decision. These conversations happen every day.
Home equity is wealth you've built. It represents years of mortgage payments, market appreciation and responsible homeownership. It's real money, sometimes six figures of real money, sitting in an asset you already own.
The temptation to tap that wealth is strong. I get it. I've felt it myself looking at my own equity statement thinking about all the things we could do with that money. New cars, vacations, home improvements, paying off debt, investing. The possibilities seem endless.
But here's what I've learned watching hundreds of homeowners make equity decisions. The ones who succeed are patient, strategic and honest with themselves about their financial discipline. They use equity for investments like education, home improvements that add value or business growth. Or necessities like medical bills and genuine emergencies. Never for lifestyle consumption.
The ones who struggle treat their home like an ATM. They borrow for wants instead of needs. They don't address underlying spending issues. They assume tomorrow will always be better than today.
Your future self, the 65-year-old version of you looking at retirement, is counting on present you to make smart decisions. That future person needs the wealth you're building now in this home.
So before you tap your equity ask yourself: Is this necessary or just wanted? Will this improve my financial situation in 5 years? Can I afford this payment even if things go wrong? Am I solving a problem or funding a lifestyle? Would my 65-year-old self thank me for this decision?
If the answers feel right move forward confidently. If they don't maybe wait, save up or find another way.
Your home is more than just an asset. It's your family's security, your retirement foundation and your financial safety net. Treat it with the respect it deserves.
And remember, no matter what you decide about home equity you're making the best choice you can with the information you have right now. That's all any of us can do.
Sources and References:
Yes, but it's significantly harder and more expensive. Most lenders require a minimum 620 credit score for home equity products with better rates available at 700 or higher. With scores below 620 you'll face higher interest rates between 9% and 12% typical in 2025, lower loan-to-value limits at 70% max instead of 85%, and more documentation requirements.
I worked with a client last year who had a 585 credit score after a medical bankruptcy three years prior. We got her approved for a $35,000 home equity loan at 11.5% on a home with $140,000 in equity. Not ideal but it beat her other options which were personal loans at 18% to 24%. She used it to consolidate remaining medical debt and pay for job training that increased her income by $22,000 annually. Two years later her score is 680 and she's refinancing to a lower rate.
If your credit is below 620 consider these steps first. Pay down credit card balances below 30% utilization. Dispute any errors on your credit report. Make all payments on time for 12 or more months. Consider adding a co-borrower with stronger credit. Six months of credit improvement can save you thousands in interest charges.
Most lenders require you to maintain 15% to 20% equity after borrowing. This is expressed as a combined loan-to-value or CLTV ratio.
Here's the calculation: Home value of $280,000. First mortgage balance of $165,000. Maximum CLTV of 85% which is typical for strong credit. Maximum total debt equals $280,000 times 0.85 equals $238,000. Current debt is $165,000. Maximum equity loan equals $238,000 minus $165,000 equals $73,000.
In this example you have $115,000 in total equity which is $280,000 minus $165,000 but can only borrow $73,000 because lenders require you to keep 15% equity in the home.
CLTV by credit score for typical 2025 standards: 780 or higher credit allows up to 90% CLTV with only 10% equity required after borrowing. 740 to 779 credit allows up to 85% CLTV with 15% equity required. 680 to 739 credit allows up to 80% CLTV with 20% equity required. 620 to 679 credit allows up to 75% CLTV with 25% equity required.
Alternative calculation: Minimum equity requirement equals home value times 1 minus maximum CLTV. For example on a $300,000 home with 85% maximum CLTV you calculate $300,000 times 0.15 equals $45,000 minimum equity you must retain.
The tax treatment depends entirely on how you use the funds. Under current IRS rules from Tax Cuts and Jobs Act of 2017 still in effect in 2025:
Interest IS deductible when you use home equity proceeds to buy, build or substantially improve your primary residence or second home. Your total mortgage debt including first mortgage plus equity loan doesn't exceed $750,000 or $375,000 if married filing separately. You itemize deductions not taking the standard deduction.
Interest is NOT deductible when you use proceeds for debt consolidation. You use proceeds for education expenses. You use proceeds for business purposes though it may be deductible as business interest instead. You use proceeds for investments which may be deductible as investment interest instead. You use proceeds for vacations, cars or other personal expenses.
Example 1 showing deductible: You borrow $50,000 via home equity loan for a kitchen renovation and second bathroom addition. Your total mortgage debt is $285,000. You pay $4,200 in interest annually. Result is you can deduct the full $4,200 if you itemize.
Example 2 showing not deductible: You borrow $30,000 via HELOC to pay off credit cards. You pay $2,700 in interest annually. Result is this interest is NOT deductible as mortgage interest even though the loan is secured by your home.
Important: The 2017 tax law substantially changed these rules. Prior to 2018 home equity interest was deductible up to $100,000 regardless of how you used the money. That's no longer true. Always consult a tax professional for your specific situation especially if you're near the $750,000 debt limit or have complex finances.
For what it's worth I used $22,000 from a home equity loan to remodel my primary bathroom last year. My accountant confirmed I can deduct the interest because it was a qualifying home improvement. But when I used another $8,000 from the same loan to consolidate credit card debt, don't judge life got expensive, that portion of the interest isn't deductible.
Timeline varies significantly by product.
Cash-out refinance: Application to approval takes 7 to 10 days. Appraisal scheduling takes 5 to 10 days after approval. Underwriting takes 7 to 14 days after appraisal. Closing takes 3 to 5 days after clear-to-close. Total timeline is 35 to 50 days typical. Funds available at closing.
Home equity loan: Application to approval takes 3 to 7 days. Appraisal takes 5 to 10 days. Underwriting takes 5 to 10 days. Closing takes 3 to 5 days. Total timeline is 20 to 35 days typical. Funds available 3 business days after closing because of right of rescission period.
HELOC: Application to approval takes 2 to 5 days. Appraisal takes 5 to 10 days sometimes waived. Underwriting takes 3 to 7 days. Closing takes 1 to 3 days. Total timeline is 15 to 25 days typical. Funds available 3 business days after closing.
Factors that speed up the process include excellent credit at 740 or higher. Complete documentation submitted upfront. Simple employment situation like W-2 employee. Recent property appraisal within 12 months. Low debt-to-income ratio. Using the same lender as your first mortgage.
Factors that slow down the process include credit issues requiring explanation. Self-employment or complex income. Missing documents. Low appraisal requiring review. High debt-to-income requiring manual underwriting. Property issues like title problems or needed repairs.
Right of rescission: For home equity loans and HELOCs on your primary residence federal law requires a 3-business-day waiting period after closing before funds are disbursed. This gives you time to cancel if you change your mind. Cash-out refinances also have this 3-day waiting period. Purchase money mortgages and loans on non-primary residences don't have this requirement.
Real example from last month: Client applied for $45,000 home equity loan on a Tuesday. We had initial approval by Friday. Appraisal was completed the following Tuesday and came in at the expected value. Final approval the following Friday. Closing the next Wednesday. Funds disbursed the following Monday which is 3 business days later. Total time was 24 calendar days from application to money in her account.
If you need funds urgently within 2 weeks home equity isn't your solution. A personal loan or even a credit card 0% balance transfer might be faster though more expensive.
Most home equity loans and HELOCs in 2025 do NOT have prepayment penalties but you must verify this before signing. This is a critical question to ask your lender.
Typical 2025 terms: Home equity loans show 95% have no prepayment penalty. You can pay extra principal monthly or pay off the entire loan early with no fees. Always confirm in your loan documents under Prepayment Terms.
HELOCs: Most have no penalty for paying down or paying off during the draw period or repayment period. However some lenders charge an early closure fee if you close the HELOC within 24 to 36 months of opening typically $300 to $500. This prevents borrowers from opening HELOCs just to get promotional rates and then closing immediately.
Cash-out refinances: Almost never have prepayment penalties in 2025 for conforming loans. Some jumbo loans or specialty products might but it's rare.
What to look for in your documents: This loan has no prepayment penalty. Or Prepayment Penalty colon None. Red flag is Early termination fee or Prepayment charges may apply.
If your loan document says ANYTHING other than no prepayment penalty ask specific questions. What triggers the penalty? How much is the penalty? How long does the penalty period last? Can I make extra principal payments without penalty even if I can't pay off the full loan?
I've seen older HELOCs originated 2015 to 2019 with prepayment penalties structured as 3-2-1 meaning 3% of balance if paid in first year, 2% in second year, 1% in third year. These are mostly gone now but if you have an older equity product check your documents.
My own situation: I have a $40,000 home equity loan at 8.1% with no prepayment penalty. Every few months I throw an extra $1,000 to $2,000 at it when cash flow allows. I've reduced the balance to $31,200 without any penalties and I could pay it off entirely tomorrow if I wanted.
You must pay off all loans secured by your home at the time of sale. This includes your first mortgage AND any home equity loans or HELOCs.
How it works at closing: The title company or closing attorney creates a settlement statement showing sale price of your home. Minus first mortgage payoff. Minus home equity loan or HELOC payoff. Minus closing costs including realtor commissions, title fees and transfer taxes. Equals net proceeds to you.
Real example: Sale price of $365,000. First mortgage balance of $187,500. Home equity loan balance of $42,800. Realtor commissions at 5% equals $18,250. Other closing costs of $3,200. Net proceeds to seller equals $365,000 minus $187,500 minus $42,800 minus $18,250 minus $3,200 equals $113,250.
The payoffs happen automatically at closing. You don't need to contact your home equity lender separately because the title company handles everything and sends payoff checks directly to all lien holders.
Important considerations: Early sale after taking equity means if you take out $50,000 in equity and sell 18 months later you might lose money due to transaction costs. Example is you extract $50,000 via cash-out refi and sell the home 18 months later. After realtor fees, closing costs and loan balance you might net $10,000 less than if you'd never refinanced. The transaction costs of selling can exceed what you gained from the equity access if your timeline is short.
Market timing risk: If home values decline after you borrow against equity you might owe more than the home is worth when you sell. During the 2008-2012 crisis many homeowners couldn't sell because they owed more than market value called being underwater. A client borrowed $95,000 via cash-out refi in 2006 when her home was worth $410,000. By 2010 the home was worth $285,000 and she owed $315,000 total. She couldn't sell without bringing $30,000 or more to closing which she didn't have.
Portability: Home equity loans and HELOCs are NOT portable. You can't transfer them to a new home. They must be paid off when you sell. Some lenders offer new equity products on your new home but these require separate applications and approvals.
This confuses people all the time so let me break it down clearly.
Home value equals what your home is worth on the current market. Home equity equals the portion of that value you actually own.
Example: Home value of $400,000 which is what it would sell for today. Mortgage balance of $260,000 which is what you still owe. Home equity of $140,000 calculated as $400,000 minus $260,000.
Another way to think about it: Home value is the whole pie. Your equity is your slice of that pie. Your lender's slice is the remaining mortgage balance. Together your slice plus the lender's slice equals the whole pie which is home value.
Home value changes due to market conditions like supply and demand in your area. Comparable sales meaning what similar homes sell for nearby. Home improvements or deterioration. Economic factors including interest rates, employment and population changes. Time of year since spring and summer typically show higher values.
Home equity changes due to paying down your mortgage balance which increases equity. Home value appreciation which increases equity. Home value depreciation which decreases equity. Taking out additional loans against the property which decreases equity.
Here’s a scenario demonstrating the difference.
Year 1: Home value of $300,000. Mortgage balance of $240,000. Equity of $60,000 which is 20%.
Year 5 in strong market: Home value of $360,000 because it appreciated 20% over 5 years. Mortgage balance of $215,000 because you've paid down $25,000 in principal. Equity of $145,000 which is 40%.
Your equity grew from $60,000 to $145,000, a $85,000 increase, because BOTH your home value increased by $60,000 AND you paid down the loan by $25,000.
Year 5 in weak market: Home value of $285,000 because it depreciated 5% over 5 years. Mortgage balance of $215,000 because you've still paid down $25,000. Equity of $70,000 which is 25%.
Even though you paid down $25,000 in principal your equity only grew by $10,000 because your home value decreased by $15,000.
Between you and me, I check my home value obsessively on Zillow even though I know I shouldn't. It's probably not even accurate. But seeing that number creep up feels like I'm making progress. My equity though, that's real. That's based on my actual mortgage balance and represents actual wealth I've built. The value is theoretical until I sell. The equity is, well, it's still theoretical too, but it feels more solid somehow. Does that make sense? Maybe I need more coffee.
Before you tap your home equity consider these alternatives that might better suit your situation.
High-yield savings or emergency fund: If you need money for known upcoming expenses not emergencies building a dedicated savings fund might be smarter than borrowing. Why this might be better includes no interest charges. No risk to your home. Maintains flexibility. Builds financial discipline.
Current rates for 2025 show many online banks offer 4.5% to 5.25% APY on savings accounts. On a $30,000 emergency fund you'd earn $1,350 to $1,575 annually while keeping full access to your money.
If you need $50,000 in 18 months for a known expense like college tuition payment, planned renovation etc, saving $2,800 per month for 18 months costs you nothing and earns interest. Borrowing it costs you 8% to 9% interest. The math strongly favors saving when you have lead time.
Personal loan: For smaller amounts between $5,000 and $35,000 a personal loan might offer faster access without putting your home at risk.
Comparison for $20,000 borrowed: Personal loan with good credit in 2025 shows rate of 9% to 13% typical. Term of 3 to 5 years typical. Payment of $427 per month at 11% for 5 years. No collateral so your home is not at risk. Fast funding often 1 to 7 days. No closing costs.
Home equity loan shows rate of 8% to 9% typical. Term of 10 to 15 years. Payment of $242 per month at 8.5% for 10 years. Collateral means your home IS at risk. Slower funding of 20 to 35 days. Closing costs of $500 to $1,500 typical.
When personal loans make sense: You need funds quickly within a week. You're borrowing less than $35,000. You don't want your home at risk. You can afford the higher monthly payment. You plan to pay it off quickly in 3 to 5 years.
I took out a $12,000 personal loan at 10.5% three years ago for an unexpected car replacement rather than touching my home equity. Was the interest rate higher? Yes. But I paid it off in 28 months and never risked my home. Looking back I'm glad I kept that equity available for true emergencies.
Zero percent balance transfer credit card: For debt consolidation specifically a 0% balance transfer might beat home equity if you can pay it off during the promotional period.
How it works: Many credit cards offer 0% APR on balance transfers for 12 to 21 months as of late 2025 with a 3% to 5% balance transfer fee.
Example: Transfer $15,000 in credit card debt. Transfer fee of 3% equals $450. Promotional period of 18 months at 0%. Monthly payment needed of $857 to pay off before interest kicks in. Total cost of $15,450 which is original debt plus transfer fee.
Compare to home equity loan: Borrow $15,000 at 8.5% for 10 years. Monthly payment of $186. Total interest over 10 years of $7,320. Total cost of $22,320.
If you can afford the $857 per month payment and pay off the debt in 18 months the balance transfer saves you $6,870 compared to a 10-year home equity loan.
Critical warning: If you DON'T pay it off during the 0% period the remaining balance typically jumps to 18% to 29% APR. Also new purchases on that card usually don't get the 0% rate. You need extreme discipline for this strategy to work.
Retirement account loans from 401k or 403b: Some employer retirement plans allow you to borrow from your balance though this comes with significant downsides.
Typical 401k loan terms: Maximum amount is lesser of $50,000 or 50% of vested balance. Interest rate is Prime plus 1% to 2% around 9% to 10% in 2025. Repayment term of 5 years typical up to 15 years if used to purchase primary residence. Interest paid to yourself because the interest goes back into your 401k not to a lender.
Comparison for $40,000 borrowed: 401k loan shows rate of 9.5% typical. Payment of $836 per month for 5 years. Approval is usually automatic if plan allows. No credit check. Interest goes to your account. Risk is if you leave or lose job full balance often due within 60 to 90 days or treated as taxable distribution with 10% penalty if under 59 and a half.
Home equity loan shows rate of 8% to 9%. Payment of $488 per month for 10 years. Approval requires credit check and equity verification. Interest goes to lender. Risk is home foreclosure if you can't pay.
When 401k loans might make sense: You have stable employment with no plans to leave. You need funds urgently with bad credit. You're disciplined about repayment. Your retirement savings is strong and can handle the temporary reduction.
When to avoid 401k loans: You're unsure about job security. You're within 5 to 10 years of retirement. You're not maxing out contributions, fix that first. Your retirement savings is already behind.
I've never borrowed from my 401k and honestly I hope I never have to. The interest paid to yourself sounds great until you realize you're missing out on potential market gains on that money. A financial advisor once told me your 401k is your future self's money. Borrowing from it is stealing from the oldest most vulnerable version of yourself. That stuck with me.
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