Many homeowners want to tap into their home’s equity potential. It’s a good option to pay for the expenses needed for your home, or even expenses that can arise in life. However, there are some common misconceptions surrounding home equity loans that we commonly see. 

Before we dive right into the common misconceptions surrounding home equity loans, let’s take a moment to clarify what exactly home equity loans are.  

We’ll begin with the basics. Home equity is the numerical difference between your property’s worth and how much is left to pay on your mortgage. A home equity loan provides a large, single payment with a fixed interest rate and can be a useful way to take advantage of the current value of your property to pay for needed expenses such as a kitchen renovation or a heating system upgrade. 

Now that we’re up to speed on what a home equity loan is, let’s clear up some of the most common misconceptions out there.  

Misconception #1: “A home equity loan is the same as a HELOC” 

Truth: Many people mistakenly lump home equity loans and HELOCs together as the same thing, but this is far from accurate. As explained above, a home equity loan is a fixed-rate, lump-sum loan. It’s helpful in cases such as home renovations or other significant expenses. A Home Equity Line of Credit (HELOC), on the other hand, acts more like a credit card, where you can use it over time as needed with variable rates.  

A HELOC can be helpful if you aren’t sure of the final price of what you’re financing, or if it will be a recurring cost. While home equity loans and HELOCs are distributed differently, they are both based on your home equity.  

Misconception #2: “I need to own my home outright to use home equity” 

Truth: Thankfully, you don’t need to have your mortgage paid off to take advantage of your home equity. Your ability to tap into your home equity is based on how much equity you currently have.  

For example, if you own a home with an equity of $300,000 and still owe $180,000 on your mortgage, you’ll have $120,000 in equity. The amount you have paid off your mortgage determines the amount of equity available to you. In this particular scenario, you may be eligible for a HELOC or home equity loan even though you’re currently making monthly mortgage payments. 

Misconception #3: “I can’t get a HELOC because my mortgage rate is low” 

Truth: Many people assume they can’t obtain a HELOC because their mortgage rate is too low. Fortunately, your first-mortgage rate doesn’t affect your ability to open a HELOC. A HELOC and your first-mortgage rate are two separate financial products. A HELOC is considered a “secondary loan,” meaning that it’s an entirely separate loan from your mortgage.  

For example, if you have a 3% first-mortgage rate on your home, you can still open a HELOC at today’s current rates without refinancing your original loan.  

Misconception #4: “Home equity loans are only for big renovations” 

Truth: Home equity loans can be used for a variety of your financial goals, not just those big home renovations you’ve been planning for years. Here’s a few examples: 

• Consolidating high‑interest debt 

• Covering emergency repairs 

• Funding education or childcare 

• Preparing for seasonal expenses 

• Energy‑efficient upgrades 

Utilizing your home equity can help in many ways. If you want to pay off that high-interest credit card debt, cover tuition fees, or settle unexpected medical bills, tapping into your home equity can help you accomplish those goals.  

Misconception #5: “Using home equity will hurt my credit” 

Truth: While there can be an initial decline in your credit score when applying for a home equity loan or HELOC, when the loan is used responsibly, it can help your credit profile in the long run.  

Since applying for a home equity loan or HELOC requires a hard inquiry into your credit profile, this can cause an initial dip in your credit score. Regardless of this fact, using your home equity can benefit your credit score in the long run if you make all your payments on time. Your credit score can be boosted if you manage these loans well and keep payments current, but you can also damage your credit if you miss payments.  

To put this into perspective, imagine you decide to consolidate your credit card debt into a home equity loan with a lower rate. Your credit score may improve as revolving balances decrease, and payments become more manageable.  

Misconception #6: “A HELOC is too risky because the rate can change” 

Truth: HELOCs have variable rates, which may lead you to believe that they’re a risky option for borrowers. However, a HELOC isn’t inherently risky when it’s used responsibly.  

The key to HELOCs is to only borrow what you need when you need it. This is the alternative to taking on a large lump-sum loan all at once. The flexibility of a HELOC allows you to manage your cashflow, keep monthly payments lower, and avoid paying interest on money you’re not using.  

Additionally, HELOCs have safeguards to encourage responsible usage, such as credit limits, underwriting requirements, and periodic reviews to help ensure borrowers aren’t overextended. If you have a stable income, manage your spending habits, and understand the terms and conditions, a HELOC can be a great, low-risk tool to help you reach your financial goals.  

Misconception #7: “All debt should be rolled into a home equity loan” 

Truth: As we touched on earlier, a home equity loan can be a great way to consolidate debt, but some debts are better left separate. It may not be the best move to roll all your debt into a home equity loan. 

Rolling short-term or low balance debts into a long‑term home equity loan has the potential to extend repayment unnecessarily. Instead, consolidating high‑interest credit cards or personal loans can be a smart move. 

Rolling your high-interest debt into your home equity loan, rather than short-term or low balance debt, is the best practice to keep your loans working to your advantage.  

Misconception #8: “Home equity loans take forever to close” 

Truth: Home equity loans may look like a complicated commitment that will be difficult to close out when needed, but thankfully, this isn’t the case. Most lenders have a streamlined process to close out your loan in a timely manner. As we approach spring, this season is a great time to prepare your documents if you are considering closing out your home equity loan.  

If you keep your financial information and income documents organized and readily available, your loan may be able to close in a few weeks depending on the lender and property type. 

Final Thoughts 

There’s a lot of misconceptions out there about home equity loans and HELOCs but taking the time to confront these unknowns can help any interested borrower make the best decisions regarding their loan options. By exposing these misconceptions, we hope you feel better equipped to explore both home equity loans and HELOCs alike.