4 home equity borrowing rules to follow this May, according to experts

CBS News

15-05-2025

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Borrowing from your home equity should always be done strategically, even in today's cooler interest rate climate.In today's high-interest rate environment, borrowing remains an expensive option, especially with credit cards and unsecured loans. Lingering inflation continues to underpin high interest rates and the Federal Reserve's most recent decision to pause its benchmark rate to curb consumer spending. While inflation has cooled from its peak, the latest Consumer Price Index data shows prices are still rising at an annual rate of 2.3% as of April 2025, short of the Fed's 2% target rate.
Still, if you've built up significant equity in your home, you have two lower-interest borrowing tools worth exploring: home equity loans and home equity lines of credit (HELOCs). Both typically come with lower interest rates than unsecured loans and credit cards, and you can use the funds for virtually any purpose.
However, borrowing against your home isn't something to rush into. You'll want a well-thought-out plan to get the best results. Below, we'll detail some proven rules to follow this May if you plan to tap into your home equity.
Start by seeing what home equity borrowing rates you'd be eligible for here.
4 home equity borrowing rules to follow this May
Here are four important rules to remember if you're embarking on your home equity borrowing journey this month:
Shop and compare rates and terms
Interest rates on home equity products can vary widely from lender to lender, so it's a good idea to get quotes from several financial institutions, including traditional banks, credit unions and online lenders. Pay special attention to a loan's annual percentage rate (APR), which accounts for fees and the interest rate. That will give you a more accurate estimate of the true cost of borrowing.
"Look beyond just the interest rate," says Christopher Stroup, certified financial planner and founder of Silicon Beach Financial in Santa Monica, California. "Compare APRs, repayment terms, draw periods (for HELOCs) and whether the rate is fixed or variable. Ask about rate caps and introductory 'teaser' rates." Stroup also recommends requesting detailed loan estimates and calculating total repayment costs to get the full picture.
Shop for HELOCs and home equity loans online today.
Understand the fees
Be on the lookout for fees that can drive up the cost of a home equity loan or HELOC. Depending on the lender and loan type, you could face costs like origination fees, appraisal fees or prepayment penalties.
However, many lenders reduce or waive fees in certain situations. "In many cases, these fees are waived on HELOCs and some short-term home equity loans, typically if the loan is using a primary address as collateral," says Cami Anderson, mortgage lending manager at Wasatch Peaks Credit Union. "If you are using your primary home as collateral, you can often find no-fee or very low-fee options," she says.
Choose the right term
Home equity loans usually have repayment terms between five and 30 years. For HELOCs, the term is typically 10 to 30 years, split into a 10-year draw period and a 10- to 20-year repayment period. Choosing a shorter term may save you money in interest but it'll raise your monthly payments, while a longer term could make monthly payments cheaper but cost more in interest over time.
Anderson says she advises borrowers to choose a slightly longer repayment term when rates are similar, there's no early repayment penalty, the lender allows extra principal payments and the borrower has a higher debt-to-income ratio.
"A longer term generally means you have more money in your pocket monthly to use for everyday expenses and emergencies. This means you're not 'locked' into a higher payment and a shorter term, but you can often make extra payments or pay off the loan earlier," she says.
Know when to borrow
One of the biggest questions homeowners are asking right now is whether to borrow now or wait for rates to drop. But trying to figure out which way interest rates will go is difficult for even the most seasoned economists and rate-watchers. "Trying to outguess the Fed is like trying to outguess the market—occasionally right, rarely repeatable," says Mark Stancato, founder and lead advisor at VIP Wealth Advisors.
Instead, focus on what you plan on using the funds for to guide your decision. "If the need is real—think home improvements, consolidating high-interest debt, or bridging a cash flow gap—borrowing now might make sense," says Stancato. He adds that you should pause if there's no clear need for the funds, since a loan should fund something with lasting value, not a short-term want.
The bottom line
You might consider tapping into your home's equity to fund a home renovation, college tuition or just about any other goal. If used in the right ways, this low-interest alternative to credit cards and personal loans may help you improve your financial health. You may even be able to deduct the interest charges if you use the funds for eligible purposes. For optimal results, follow the above rules and make sure your loan aligns with your overall financial plan, both this May and in the months and years to come.