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Home equity loans have historically been one of the less expensive ways to borrow money. But, in recent years, they’ve been one of the only ways to do so. While inflation surged and interest rates spiked, the cost of using a credit card or personal loan rose in tandem. Although home equity loan interest rates weren’t immune from this trend, they remained relatively low. And now, with inflation much cooler and multiple interest rate cuts since issued, they’ve dropped even further. The average home equity loan rate is now in the low 8% range, making them almost three times cheaper than credit cards.
With the average home equity loan amount at approximately $320,000 right now, and the rates on home equity loans markedly lower than many alternatives, homeowners may be considering their loan options now. Before getting started, however, borrowers should carefully consider both the pros and cons of borrowing money this way – and that extends to knowing the risks of being unable to repay all that’s been withdrawn. Below, we’ll break down what to know and how to avoid losing your home by using a home equity loan.
Start by seeing how much equity you’d be eligible to borrow here.
Can you lose your home with a home equity loan?
In short: yes, you can lose your home if you fail to repay your home equity loan in full, based on the repayment terms you agreed to when you took out the loan. Unlike credit cards or personal loans, in which no collateral is at stake (thus their higher interest rates), home equity loans put your home in the middle of the borrowing equation. Fail to make your payments and you could, potentially, lose your home to the lender in the process. So borrowers must do all they can to avoid this realistic scenario. Otherwise, the lender could foreclose on the property in which the funds were withdrawn and sell the home at an auction.
So, how do you avoid losing your home in this process? Fortunately, there are multiple ways to do so. Here are four:
Shop around for rates and lenders
To avoid losing your home when borrowing with a home equity loan it’s critical that you first find the most affordable rates and terms. This will better ensure ease of repayment over the common 10- or 15-year repayment periods. And one of the better ways to do this is by shopping around for rates and lenders. Don’t just your current mortgage lender automatically (you’re allowed to use a different bank). Instead, see what rates and offers competitor lenders have available and then use those to go back to your existing lender to see if they can beat it.
Shop for home equity loans online today.
Don’t overborrow
With an average six-figure amount of home equity, in today’s climate, it can be tempting to overborrow. But that would be a mistake, especially if you’re trying to avoid losing your home to a lender. Instead, compile a realistic budget. Determine precisely how much you need and only apply for that amount. And, if you have leftover money, consider using it to repay a portion of the loan versus spending it frivolously on other, unimportant items.
Use it for the right reasons
Utilizing your home equity loan funds for items like home repairs can potentially boost your home’s value and you may even qualify for a tax deduction. Using it for depreciating assets like vehicles or other big-ticket items, however, could cause you to quickly become “underwater,” owing more to the home lender than your home’s worth. Do all you can to avoid this situation, then, by being judicious and strategic with your intended uses for the loan funds – or risk having the home eventually foreclosed on.
Monitor the market for refinancing opportunities
If you already have a home equity loan or, ultimately, make some of the poor choices above, it’s important to remember that you have refinancing opportunities. Home equity loans can be refinanced into different rates and terms, allowing you to potentially regain some critical control over the money you’ve borrowed. Considering that home equity loan rates have fallen significantly over the last 12 months, approximately, now may be a smart time to act for existing borrowers. You may be surprised at how much you can save.
See what home equity loan refinance rate you’d be eligible for here.
The bottom line
Yes, home equity loan borrowers can lose their homes if they ultimately fail to make all of their repayments to the lender. But there’s a lot that can happen before then and multiple steps to take to avoid the worst-case scenario. By making one or more of the above moves during your home equity loan borrowing process, you can better improve your chances of success – and ensure that the home in question remains fully under your control.
