A home equity loan is often a bad idea because it puts your house up as collateral for a debt that carries high closing costs, adds tens of thousands of dollars in interest over its term, drains the ownership stake you have spent years building, and rarely delivers the tax deduction borrowers assume they will get. Before signing, it helps to see exactly what each of those costs looks like and where the loan can trap you.
Your Home Becomes the Collateral
A home equity loan creates a second lien against your property. The lender has a legal claim on the home until the balance is paid in full.1Consumer Financial Protection Bureau. What Is a Second Mortgage Loan or Junior-Lien Miss enough payments and the lender can start foreclosure and force a sale of the property, even if you are completely current on your primary mortgage. Paying down your original loan for years does not shield you from this outcome.
Losing the house does not necessarily end the debt. If the foreclosure sale brings in less than the outstanding balance, some states allow the lender to sue you for the shortfall through a deficiency judgment. That leftover debt is unsecured, similar to a credit card balance, and can lead to wage garnishment or bank levies. Whether a deficiency judgment is available depends on your state’s law.
Interest Adds Tens of Thousands to What You Owe
The largest cost of a home equity loan is the interest paid over the full term. As of early 2026, the national average rate on a 15-year home equity loan is about 8%, with individual rates ranging from roughly 6% to nearly 11% depending on credit profile and lender. Home equity loans generally carry higher rates than primary mortgages because they sit in second position for repayment.
Borrow $50,000 at 8% over 15 years and the monthly payment is about $478. By the time the loan is paid off, you have paid roughly $36,000 in interest, turning a $50,000 loan into an $86,000 obligation. A borrower who qualifies at 10% instead would pay more than $47,000 in interest on the same $50,000. That is money leaving your budget every month for a decade or more, income that is not going to savings, retirement, or anything else you might need.
Closing Costs Come Out Before You See a Dollar
Home equity loans carry a full round of upfront fees. Expect an origination fee of roughly 1% to 3% of the loan amount, plus appraisal, title search, title insurance, document preparation, and recording fees. Total closing costs typically run 2% to 5% of the loan. On a $100,000 loan, that is $2,000 to $5,000 gone before the funds hit your account. Federal law requires lenders to disclose the full finance charge and annual percentage rate up front so you can see what the credit actually costs.2Office of the Law Revision Counsel. 15 USC 1601 – Congressional Findings and Declaration of Purpose
Small loans get hit hardest by these fees in percentage terms. Borrow $30,000 with $1,500 in closing costs and you have already surrendered 5% of the loan to expenses. Unlike a purchase mortgage, where the fees buy you an asset, a home equity loan just converts existing ownership into debt. The fees are a pure cost.
Prepayment Penalties on Some Loans
Some home equity loans still charge a penalty for paying the balance off early. Federal rules that took effect in 2014 banned prepayment penalties on most new residential mortgages, but they remain allowed on fixed-rate loans that qualify as “qualified mortgages” and are not higher-priced.3eCFR. 12 CFR 1026.43 – Minimum Standards for Transactions Secured by a Dwelling Where allowed, the penalty is capped at 2% of the outstanding balance in the first two years and 1% in the third, with no penalty after year three. Any lender offering a loan with a prepayment penalty must also offer a version without one, so ask.
The Tax Deduction You Probably Cannot Take
Many borrowers assume home equity loan interest is tax-deductible. Since 2018 it has not been, unless the money is used for a specific purpose. Under current law, made permanent for tax years beginning in 2026 by the One Big Beautiful Bill Act, you can deduct home equity loan interest only if you used the borrowed funds to buy, build, or substantially improve the home that secures the loan.4Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction Use the money for debt consolidation, a vacation, medical bills, tuition, or anything else and none of the interest is deductible.
Even when the money does go into the home, there is a ceiling. Interest is deductible on a combined total of $750,000 in mortgage debt across your primary and any second home, or $375,000 if married filing separately.4Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction If your first mortgage is already near that cap, the home equity interest may be partially or entirely nondeductible. Borrowers who count on the deduction often discover at tax time that the actual benefit is zero.
Draining Equity and Getting Stuck Underwater
Every dollar you borrow shrinks the ownership stake in your home. For most households that stake is the single largest source of wealth, and a home equity loan converts it back into debt. If property values then dip, even by 10%, you can end up underwater: owing more across both mortgages than the home is worth.
That situation limits your options in every direction. Selling the home no longer covers both loans, so you either bring cash to closing or negotiate a short sale, which the second lender is unlikely to approve because it stands to receive little or nothing. Refinancing the primary mortgage also becomes difficult. Conventional refinances generally require at least 20% equity, and a large second lien pushes combined loan-to-value above that line. You end up locked into whatever terms you have, unable to sell, unable to refinance, and still making payments.
Less Room to Borrow for Anything Else
Adding a home equity payment raises your debt-to-income ratio. Most lenders want a total ratio below 36% and stretch to 43% at the outside.5Legal Information Institute. Debt-to-Income Ratio A few hundred dollars a month in new debt service can put you over the line for an auto loan, a credit card, or a future mortgage.
Federal ability-to-repay rules require lenders to check that you can afford new mortgage debt, and a home equity payment already on your books eats into what any new lender will approve.3eCFR. 12 CFR 1026.43 – Minimum Standards for Transactions Secured by a Dwelling A 10- or 20-year home equity term means 10 or 20 years of reduced flexibility. If a job move, a family need, or a business opportunity comes up, the loan you took years earlier is still shaping what you can and cannot do.
Bankruptcy Does Not Erase the Lien
If a home equity loan contributes to bankruptcy, the debt is harder to shake than unsecured obligations. In Chapter 7, the discharge eliminates your personal obligation to repay, but the lien on the home survives. To keep the property you have to keep paying both mortgages. If the home’s equity exceeds your state’s homestead exemption, the trustee may sell it and pay creditors from the proceeds, including the home equity lender.
Chapter 13 offers one narrow tool. If your first mortgage balance alone already exceeds the home’s current market value, the court can “strip” the second lien and treat it as unsecured debt.6Office of the Law Revision Counsel. 11 USC 506 – Determination of Secured Status If any value remains above the first mortgage, even a little, the lien stays put. Chapter 13 also requires three to five years of court-supervised payments.
If You Already Signed, You Have Three Days
Federal law lets you back out of a home equity loan after closing. Under the Truth in Lending Act, you have until midnight of the third business day after closing to cancel with no penalty and no reason required.7Office of the Law Revision Counsel. 15 USC 1635 – Right of Rescission as to Certain Transactions Business days include Saturdays but not Sundays or federal holidays.8Consumer Financial Protection Bureau. How Long Do I Have to Rescind When Does the Right of Rescission Start
The clock starts only after all three of these happen: you sign the loan agreement, you receive the Truth in Lending disclosure, and you receive two copies of the notice explaining your cancellation right.8Consumer Financial Protection Bureau. How Long Do I Have to Rescind When Does the Right of Rescission Start If the lender left out the disclosure or the rescission notice, or provided a version with errors, your window extends to three years from closing.7Office of the Law Revision Counsel. 15 USC 1635 – Right of Rescission as to Certain Transactions The right of rescission covers home equity loans and refinances. It does not apply to a mortgage taken out to purchase a home.