Pros and Cons of Home Equity Loans

By Bill Lyons | Published on February 20, 2025

How a Home Equity Loan Works

A home equity loan lets you borrow money by using your home’s equity as collateral. Equity is the difference between your home’s value and what you still owe on your mortgage.

For example, if your home is worth $300,000 and you owe $200,000, you have $100,000 in equity. A home equity loan allows you to tap into that equity, giving you a lump sum of cash upfront.

This type of loan usually has a fixed interest rate, meaning your monthly payments remain steady over time. It’s a straightforward option if you need a large amount of money for a specific purpose, such as renovating your home, paying off high-interest debts, or covering major expenses.

While similar to a home equity line of credit, or HELOC, a home equity loan isn’t the same. A HELOC works more like a credit card, letting you borrow as needed within a set limit, while a home equity loan gives you a one-time payout.

Ultimately, only you can decide if a home equity loan suits your unique financial situation. Let’s get into how they compare to HELOCs and more pros and cons of home equity loans so you can decide what’s right for you.

HELOAN vs HELOC: What’s the Difference?

Breaking down the key differences between HELOAN vs HELOC helps you decide which option fits your needs.

A home equity loan (HELOAN) gives you a fixed amount of money upfront, often at a fixed interest rate. You’ll pay it back in predictable monthly installments, making it ideal for large, one-time expenses like a major home renovation.

Say you need $40,000 to build an addition to your home. A HELOAN delivers that full amount to you all at once.

On the other hand, a home equity line of credit (HELOC) is more flexible. Instead of a lump sum, you receive a credit line to borrow from as needed, up to a set limit. A HELOC is a better fit if you face ongoing or unpredictable costs, like covering medical bills or small renovation projects over time.

Most HELOCs have variable interest rates, meaning your payments could change over time. However, some lenders offer a fixed-rate HELOC for those who prefer steady payments.

When comparing the pros and cons of HELOC loans to a HELOAN, remember that a HELOC offers flexibility but requires careful management, especially with variable rates. A HELOAN, on the other hand, provides stability but lacks the adaptability of a line of credit.

Home Equity Loans: Pros and Cons

While a home equity loan allows you to tap into your home’s value to cover big expenses, weighing all the benefits against the potential drawbacks is still important. Let’s get into the pros and cons of home equity loans to help you decide if it’s the right choice for your needs.

Pros of Home Equity Loans

• Predictable payments: With a fixed interest rate, your monthly payments stay consistent. This makes it easier to plan your budget, especially for long-term loans. For example, if you borrow $50,000 to consolidate debt, you’ll know exactly how much to set aside each month.
• Lump sum of cash: You receive the full loan amount upfront, making it perfect for large, one-time expenses like remodeling your kitchen or paying for a child’s college tuition.
• Lower interest rates: Compared to personal loans or credit cards, home equity loans often come with lower rates, saving you money over time.

Cons of Home Equity Loans

• Risk of losing your home: Since your home is collateral, failing to make payments could result in foreclosure.
• Closing costs and fees: Just like your original mortgage, home equity loans include fees that can add up quickly.
• Less flexibility: Once you receive the lump sum, you can’t borrow more. If unexpected costs arise later, you’ll need another loan.

While home equity loans offer stability and can be a smart financial tool, they may not be ideal for ongoing expenses. Consider the pros and cons of home equity line of credit options if you need more flexibility.

Is a Home Equity Loan a Good Idea?

When deciding if a home equity loan is a good idea or not, make sure you understand your full financial situation.

Ultimately, a home equity loan can be a smart choice, but it depends on your needs, goals, and how you plan to use the funds. For many, it’s an excellent way to leverage home equity and secure lower-cost financing compared to credit cards or personal loans.

If you’re looking to consolidate debt, for example, a home equity loan can help you streamline high-interest payments into a single, manageable monthly payment. With interest rates significantly lower than most credit cards, you can save money over time while paying down your balance faster.

Home equity loans are also a good option for large, planned expenses. For instance, if you want to fund a major home renovation, such as adding a new bathroom or upgrading your kitchen, the lump sum gives you immediate access to the money you need.

However, it’s still important to consider all the home equity loan pros and cons. While predictable payments and lower rates are major benefits, remember that your home serves as collateral. Missing payments puts your property at risk, so it’s essential to borrow only what you can comfortably repay.

If flexibility is a concern, you should explore the pros and cons of HELOC loans, as a HELOC allows for ongoing borrowing within a credit limit. Whether a home equity loan is a good idea depends on your financial priorities and ability to manage the loan responsibly.

Home Equity Loan Alternatives

If a home equity loan doesn’t fit your needs, several alternatives can provide financing based on your goals. Whether you’re funding home improvements, managing expenses, or exploring opportunities like an investment property loan, these options offer flexibility and unique benefits. Here are four common alternatives to consider.

Cash-Out Refinance

A cash-out refinance replaces your current mortgage with a new one for a larger amount, giving you the difference in cash. It’s ideal to refinance at a lower interest rate while accessing funds for significant expenses.

For example, if your home is worth $300,000 and you owe $200,000, you could refinance for $250,000 and receive $50,000 in cash. It works best when mortgage rates are low, as it combines financing with cost savings.

Reverse Mortgage

If you’re 62 or older, a reverse mortgage allows you to convert your home equity into cash without monthly repayments while living in your home. Instead, the loan is repaid when you sell the house or move out. This option is great for retirees needing to supplement income or cover medical expenses. However, it reduces your home equity, so it’s worth considering long-term financial implications.

Private Money Loan

Private money loans are short-term loans funded by private lenders rather than banks. They’re often used for real estate investments, such as flipping houses or purchasing properties. Although they have higher interest rates, they offer fast approval and flexible terms, making them a great option when time is critical.

Personal Loan

A personal loan offers unsecured financing, meaning you don’t use your home as collateral. This makes it a less risky option for minor expenses, like paying off high-interest debt or funding a wedding. While rates are typically higher than those for home equity loans, personal loans are easier to obtain if you don’t have significant home equity.

Weigh the Pros and Cons of HELOCs and HELOANs

Your home’s equity can be a powerful tool for achieving your financial goals. Whether you’re consolidating debt, funding a dream renovation, or simply weighing the pros and cons of home equity loans against other options, understanding your choices is key to making the right move.

Griffin Funding is here to help you unlock that potential with personalized solutions designed to fit your needs. Plus, with the Griffin Gold app, you can easily manage your finances, track your credit, and speak with experienced loan specialists.

As you evaluate HELOAN and HELOC pros and cons, remember that the right financing choice can open doors to a brighter future. With Griffin Funding’s expertise and commitment to your success, you’re never navigating these decisions alone. Reach out today to turn your home equity into an opportunity.

Bill Lyons

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 23 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 11 years in business.