Why Is Home Equity Borrowing On The Rise?

The origination of home equity loans, home equity lines of credit (HELOCs) and cash-out-refinances rose 11 percent in the fourth quarter of 2024, according to TransUnion. That marks the third straight quarter of year-over-year increases. And it doesn’t stop there. HELOC balances are growing too — by $6 billion in Q1 2025, the 12th consecutive quarter of gains, according to the New York Federal Reserve. 

Clearly, home equity lending is having a moment. One key reason: Rates for HELOCs and home equity loans have come down from their 2024 peak, while mortgage rates and other interest rates have remained stubbornly high. This phenomenon has made borrowing against one’s homeownership stake better than alternatives like mortgage refis, personal loans or credit cards. That’s especially true if the need for cash relates to home remodeling, renovation or repair (the leading reason people tap their home equity).

And with equity levels at record highs, homeowners have more to work with than ever. According to ICE Mortgage Technology, homeowner equity hit $17.6 trillion entering the second quarter of 2025.

Let’s look deeper into why home equity loans and HELOCs are on the rise and what you should know if you are tempted to join the trend.

What is home equity?

Why are homeowners tapping into their equity?

Why are homeowners taking advantage of HELOCs and home equity loans? Largely because they can. The pandemic-fueled real estate boom has led to lofty ownership gains in the past two years. More than 46 percent of mortgage-holding homeowners are “equity-rich” —meaning they owe no more than half of their home’s value—a share that remains near record highs, according to ATTOM.

Add to the mix: An improvement in borrowing costs. After skyrocketing in 2022-23, home equity products’ interest rates began to soften in 2024, a trend that’s continued this year. Though HELOCs have been bobbing around of late, as of June they remain a full percentage point lower than they were a year ago, according to Bankrate’s national survey of lenders. As for home equity loans, they are near their lows of the year. 

As to homeowners’ motives: Many people are using their home equity to spruce up their properties and better equip them to meet their family’s needs. In fact, Bankrate’s Home Equity Insights Survey found that over half (55 percent) of current homeowners see repairs and improvements as a good reason to tap into their home’s value.

Borrowing money to upgrade an old home makes a lot more sense than trying to buy a new one nowadays. Nearly 60 percent of the almost 51 million active mortgages carry rates below 4 percent, according to the Consumer Financial Protection Bureau. One-fifth have rates at or above 5 percent. With purchase mortgage rates now averaging nearly 7 percent and record-high housing prices, the math of moving simply doesn’t add up. 

If you want to fund renovations, these high mortgage rates also mean taking out a home equity loan makes more sense than a cash-out refinance these days.  A cash-out refi, in which you take out a new mortgage that includes a lump sum to play with, would also mean giving up your old interest rate for a new, presumably higher, one. In contrast, “a home equity loan allows you to leave that first [mortgage] in place,” says Scott Bridges, chief consumer direct lending officer at Pennymac, a California-based lender. 

Of course, there are plenty of other reasons for tapping home equity. If you’ve got big credit card balances, a home equity loan or HELOC offers a lower-cost way to carry that debt. Along with saving you money, they offer the convenience of consolidating your debts into one monthly payment. As household debt stands at a record $18+ trillion in the first quarter of 2025, debt consolidation is the second most common reason homeowners cite for tapping their home equity in the Bankrate survey. 

“You combine a rich equity market with a pretty high debt market, and you have a perfect solution in the home equity loan,” says Bridges.

What does the home equity loan boom mean for the housing market?

Mark Hamrick, senior economic analyst at Bankrate, describes today’s housing market as a classic case of ‘good news, bad news.’ 

The bad news? Aspiring homeowners are facing challenges of affordability, lack of supply and high mortgage rates. The good news? In the midst of those same challenges, homeowners are enjoying the benefits of rising home prices and equity levels.  

“For many current owners, the proverbial payday comes into play when it’s time to sell, maybe sometime in the future,” says Hamrick. “But before that time, tapping equity by using the tools of home equity loans and HELOCs brings an earlier benefit.” 

One of those benefits could include a more valuable property, if the tapped equity funds go towards renovating or modernizing the home. Another bright spot: If a HELOC or home equity loan is used for housing-related repairs or remodels, the interest can be tax-deductible. That can reduce the real cost of the financing.

And homeowners could use such a reduction in real costs. While home equity interest rates have fallen from last year’s highs, they aren’t nearly as cheap as they used to be. For example, rates on 10-year home equity loans averaged 5.66 percent in June 2020. As of June 18, 2025, its rate was averaging 8.41 percent. HELOCs, too, are relatively high: now averaging 8.27 percent, vs. 4.71 percent five years ago. 

Downsides of the home equity borrowing boom

One potential concern of the equity borrowing boom: More homes could wind up in foreclosure or in financial straits, due to homeowners borrowing blithely without fully realizing the consequences. Greg McBride, chief financial analyst at Bankrate points out that paying off credit cards or other debts with a home equity loan puts the roof over your head on the line.

“When you take unsecured credit card or personal loan debt and secure it with your home, the consequences of default are a whole different ball game,” he says. To put it bluntly, you could lose your home — as collateral for the loan, it can be seized to pay off your debt.

Equity values could fall

Admittedly, that’s a worst-case scenario. But be aware that if home values fall, your house could be worth less than all the outstanding mortgage(s) on it. In other words, you owe more than your home’s worth — you have “negative equity,” in real estate-lending lingo. If your debt totals at least 25 percent more than the actual property value – that’s defined as seriously underwater.

According to a recent report from ATTOM, the percentage of seriously underwater homes rose in the first quarter of 2025 in 48 states and Washington, D.C. , with the biggest year-over-year increases in Kansas, Utah and South Carolina. At 2.8 percent of all homes, it’s still a fraction of the housing market — but a potential warning sign.

The point is simple: Be mindful of the trajectory of housing prices in your area, and don’t take on more debt if you’re concerned that your property value has the potential to drop. No one is predicting a crash in the housing market. But nothing rises forever, and it’s dangerous to take on excess debt on the assumption that it does.

How to get the best home equity lending rate

Whether you’re hoping to add on a new kitchen or pay off that oversized credit card balance, a HELOC or home equity loan still presents a potentially less-expensive means to those ends. While there are differences in how each product works, the process of shopping around for one remains the same. Here are some tips:

1. Calculate your equity.

You know your home’s value has gone up, but you’re not sure where exactly you stand. Estimate your home’s equity by taking the difference between the value of your home and what you still owe on your mortgage. The best determination of value would come from a licensed appraiser, but for a rough idea, look at an online home price estimator or home equity calculator. Once you have a number, find your mortgage balance on your most recent statement, and do the math.

2. Get your credit in excellent shape before you apply.

Home equity financing requires a pretty strong financial profile, especially for lines of credit. In the third quarter of 2024, the median credit score of a HELOC applicant was 763, according to Home Mortgage Disclosure Act data. While many home equity lenders do approve applicants with lower credit scores, the rule that applies to every loan still rings true: Borrowers with higher credit scores always secure the lowest rates.

If you aren’t sure of the best way to boost your credit score, start by looking at your credit cards. Bankrate’s most recent Credit Card Debt Survey found that over half (53 percent) of credit card debtors have carried a balance for at least a year. Lenders will look at your credit utilization ratio and your minimum payment obligations when evaluating your application. The lower you can get those balances, the better off you’ll be – both in terms of the likelihood of approval and your overall financial well-being due to lowering your interest charges.

3. Start your search with your current bank.

While there are several types of home equity lenders, begin with the place you already know: your bank or credit union. A lot of institutions offer rate discounts — 0.25 percent or 0.5 percent savings — for customers who set up auto-pay from checking or savings accounts. But check out an offer or two from an online-only lender, as well — if eligible, you might be able to get your funds sooner, or for a lower cost.

4. Compare fees and terms.

It’s not just about being offered the lowest rate. You will want to consider the total cost of borrowing, aka the loan’s annual percentage rate (APR), which factors in all the fees related to the loan, in addition to the interest rate. While home equity loans and HELOCs tend to have significantly lower closing costs than first mortgages, McBride recommends comparison shopping and paying close attention to the loan proposal’s fine print. For example, some lenders charge large origination fees. Or they will offer to cover the closing costs on a HELOC, “as long as you maintain the line of credit for three years,” McBride says. 

FAQ

• How does a home equity loan work?
  

  A home equity loan is a second mortgage that allows you to borrow against the equity stake you have built up in your property. It’s another loan with a separate set of payments that you’ll make in addition to the payments you make on your first mortgage. With a home equity loan, you will receive a lump cash sum that you will begin paying back immediately with interest.

• How do you get a home equity loan?
  

  To get a home equity loan, you’ll need to meet your lender’s requirements. Those look different from lender to lender, but generally, you’ll need to have a sizable chunk of equity, a credit score in the mid-600s (higher is better), a debt-to-income ratio below 43 percent and proof of a steady stream of income. Keep in mind that you won’t be able to borrow against your entire chunk of equity, either; most lenders want borrowers to maintain a minimum of 15 percent equity in the property.

• How can you increase your home equity?
  

  There are a few ways to increase your home equity. You can make bigger payments against the principal balance, paying down your mortgage faster (and increasing your ownership stake). Or you can increase your home’s value by making it a more desirable place to live with a new kitchen, additional bathroom, finished basement or some other project that will make it worth more to a prospective buyer. Additionally, although it’s beyond your control, your equity can naturally increase due to rising property values in your town or neighborhood.