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5 Mistakes to Avoid When Tapping Your Home Equity
Before borrowing against your home, understand the risks and trade-offs
5-minute read
Pete Ryan
Key takeaways
- Older homeowners hold a large share of home equity, with those age 55 and older holding more than 60 percent of U.S. real estate wealth.
- Homeowners can access equity through a cash-out refinance, a home equity loan, a home equity line of credit or a reverse mortgage. The fees, interest rates and repayment terms vary between these tools.
- Financial professionals say borrowers should shop multiple lenders, spend the money responsibly and plan for potential payment increases.
While rising home values have created challenges for folks looking to move in today’s market, they’ve been a boon to the net worth of existing homeowners who wish to stay put.
Homeowners with mortgages held a collective equity of $17.9 trillion in the first quarter of 2026, according to Cotality, a property data and analytics firm.
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Older Americans, especially those who purchased their homes decades ago, own a disproportionate share of that equity. Redfin research published earlier this year showed homeowners age 55 and older hold more than 60 percent of real estate wealth in the U.S. Furthermore, home equity among homeowners age 62 and older reached a record $15.34 trillion in the second quarter of 2026, according to data from the National Reverse Mortgage Lenders Association.
“You have a lot of older folks who are sitting on lots of equity because they bought places when they were more affordable and [the value of those homes] has run up like crazy,” says Kevin Liebowitz, a mortgage broker with Grayton Mortgage in Brooklyn, New York.
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If you’ve gained significant equity in your home, you may be thinking about tapping into it. In 2025, 28 percent of homeowners with mortgages told MeridianLink, a digital lending platform, that they were considering taking out a home equity loan, up from 21 percent in 2022. And a home equity loan is just one option for borrowing against your home equity.
While unlocking your property’s equity may make sense in certain financial situations, there are risks.
“When you’re tapping your home equity, that is an extra lien on your house,” cautions Linda Bell, lead insight analyst and home equity expert at Bankrate. If you fall behind on payments, you risk losing your home to foreclosure, she says.
Here are five common mistakes to avoid.
Choosing the wrong borrowing tool
You have several options when pulling cash out of your home:
- Cash-out refinance: With a cash-out refi, you replace your current mortgage with a new loan that’s higher than the amount you already owe. You might consider going this route if you want the simplicity of a single loan or if current mortgage rates are significantly below your current rate.
- Home equity loan: Also known as a second mortgage, a home equity loan is an additional debt that uses your home as collateral. These loans, which typically have fixed interest rates, may be best if you’re looking for a lump sum of money to pay for a one-time expense, like debt consolidation, and want a predictable payment schedule without altering your current mortgage.
- Home equity line of credit: A HELOC is a revolving line of credit secured against your home that you can tap into as needed. They typically have variable interest rates. “Basically, it’s a credit card stapled to your house,” Leibowitz says. It could be a suitable source of funds for ongoing, variable expenses like home renovations.
- Reverse mortgage: A reverse mortgage is a loan against your house, but unlike with a traditional mortgage, you don’t make monthly payments to a lender. Instead, the lender pays you, essentially working in “reverse.” Generally, you need to be 62 or older to qualify. Reverse mortgages often have higher fees and higher interest rates than other types of home equity borrowing.
Before choosing a borrowing tool, “Make sure you understand how each one works, the fees, the interest charges, repayment requirements and how it could affect your estate plan,” Bell says.
Using the cash for nonessential expenses
Experts say to avoid using a home equity loan or line of credit to fund a large discretionary expense such as a vacation. Doing so is trading long-term pain for short-term gain, says Lynette Arrasmith, a mortgage adviser with Churchill Mortgage in Omaha, Nebraska.
“You are adding a payment and interest to your monthly budget,” she says. “This reduces your equity and available cash flow.”
Borrowing more than you need
But just because you qualify for a large home equity loan or line of credit doesn’t mean you should borrow the full amount, Bell says.
Borrowing an amount that’s outside your means could put you at risk of becoming “underwater” on your mortgage, meaning you end up owing more than your home is worth.
Only borrow what you truly need, says Bell. If you’re planning to get a home equity loan, know that many lenders recommend borrowing no more than 80 percent of your home equity.
Failing to plan for higher interest rates with a HELOC
HELOCs have two phases: a draw period, typically the first 5 to 10 years, during which borrowers pay interest only on the money they use, and a repayment period, which begins when the draw period ends and during which borrowers pay both principal and interest. The interest rate is usually variable during both periods.
“In my experience, many borrowers understand in theory that a HELOC has a variable rate, but they significantly underestimate what that means in dollar terms,” says Diane Pearson, a certified financial planner with Pearson Financial Planning in Pittsburgh. “If the loan is for 6 percent, they don’t think about what happens if it goes up to 8 percent or 10 percent.”
A HELOC payment that feels affordable today could become a significant burden if interest rates rise, especially during the repayment period, which can last up to 20 years.
Only talking to one lender
Interest rates, fees and borrowing limits for mortgages, home equity loans, HELOCs and some reverse mortgages can vary significantly across lenders, so it’s worth shopping around to make sure you’re getting the best terms.
Even a slight difference in the interest rate can save you thousands over the life of a loan. For example, the total interest paid on a 10-year, $100,000 home equity loan with an 8 percent interest rate is nearly $46,000, versus nearly $49,000 on an 8.5 percent loan.
Carve out time to get quotes from several lenders, such as a bank, credit union or online lender. Credit unions tend to offer lower fees and competitive rates to members, but you may get a better offer from a bank if you have an existing relationship. Online lenders offer the convenience of an entirely digital process, often with quicker turnaround times for loan approval.
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