4 things home equity borrowers should avoid going into 2025

With just weeks left in 2024, there are some key moves prospective home equity borrowers should make going into 2025. But, when utilizing a critical asset like your home, there are also some major things they should avoid. 

After all, when using a home equity loan or home equity line of credit (HELOC), your home functions as collateral. Fail to repay all that you’ve borrowed and you could potentially risk your homeownership in the process. So it’s just as critical to know what not to do as it is to know which steps to take, particularly in today’s evolving economic landscape. Below, we’ll detail four big things home equity borrowers should avoid heading into the new year.

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4 things home equity borrowers should avoid going into 2025

Here are four major things home equity borrowers, no matter their financial circumstances, should avoid doing as we move into a new year:

Assume rates will continue to decline

Sure, both HELOC and home equity loan interest rates have been on a steady downward path for all of 2024. But it would be a mistake to simply assume that rates will continue to decline in 2025. The most recent inflation reading was hotter than hoped for, and if it continues to remain above the Federal Reserve’s 2% goal, additional rate cuts could be paused or even reversed. But any other number of economic factors could also result in higher rates than what’s currently available. So consider acting now or wait, but understand that delaying on the assumption that rates will continue to decline is risky.

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Open a HELOC on the assumption it will become cheaper

If you make the first mistake noted above, then it may lead to making this second one. So don’t make either. Opening a HELOC on the assumption that it will become cheaper thanks to interest rate cuts (and the variable rate structure of HELOCs) is something to avoid in general, particularly going into 2025 when predictions for the wider interest rate climate vary widely. 

Instead, look to home equity loans. These have slightly lower rates than HELOCs right now and they’re fixed, meaning that borrowers won’t need to worry about up and down movement in the rate climate since their payments will remain the same (unless refinanced).

Borrow more because your home value is high 

Home values have risen in recent years and the average homeowner currently has around $327,000 worth of equity to use now. Even accounting for the conventional 20% most lenders prefer borrowers to keep in their homes, this still equates to a six-figure sum of equity to borrow. 

But borrowing more because your home value is high now is a mistake. Home values rise and fall, sometimes dramatically, based on a number of economic considerations. Overborrowing now, then, ahead of a possible home price drop in 2025 could quickly lead to you being underwater by owing more than what your home is worth. Be strategic and smart with how much you ultimately withdraw. 

Automatically use your current lender

Even if you’re happy with your current mortgage lender, it would be a critical mistake not to shop around first. You don’t need to automatically use your existing lender so you might as well look around to see what rates and terms competitors are offering. 

In some instances, your current lender may still be the best alternative. In others, however, you may be better off by making the switch to a different bank. Or you can take a better offer back to your original lender to see if they can beat it. You won’t know which is the most cost-effective, though, until you start doing your research.

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The bottom line

Your home is likely your biggest and most important financial asset. So don’t borrow from it in a cavalier way. This means not assuming that interest rates and, thus HELOC rates, will continue to decline in 2025. Homeowners should also avoid overborrowing, even with home values high at the moment and they should explore all potential lenders, not just the one that currently owns their mortgage loan. By avoiding these potential errors now, home equity borrowers can improve their chances of financial success both in the new year and over the long term.