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8 home-equity myths that are holding owners back

Home equity is one of the biggest sources of wealth for American homeowners. Without the right context, decisions about home equity can get expensive, whether you’re considering borrowing against your equity now or in the future. has compiled the eight biggest myths that may be costing you money.

Myth #1: Home equity equals cash in your pocket

Perhaps one of the most pervasive misconceptions about home equity is that it automatically means money in your pocket. The truth is that equity is only paper wealth, as opposed to liquid wealth.

This simply means that the wealth is tied up in the value of your home and cannot be instantly accessed. You must either borrow against it or sell your home, both of which involve significant time and costs. Money from borrowing against your home is not free either, as your home serves as the collateral, and you will need to pay interest and principal with most financing options, such as home equity lines of credit () and .

Myth #2: Your home value will always appreciate, so equity is risk-free

Many homeowners assume that home values always go up but, while long-term trends typically show growth, markets can fluctuate in the short term. During the Great Recession, as per data stored by the page, home prices fell by over a fifth on average across the nation from the first quarter of 2007 to the second quarter of 2011.

And price pullbacks aren’t just a history lesson. When mortgage rates rose sharply, the recorded consecutive month-to-month national declines in mid-2022. More recently, reported that 53% of U.S. homes lost value over the past year — the highest share since 2012.

It’s best to treat equity as an asset that’s tied to market risk, as opposed to a guaranteed windfall. That’s why accessing equity strategically, rather than waiting indefinitely, can help you avoid getting caught on the wrong side of a market shift.

Myth #3: You should only leverage home equity for major remodeling

While it’s true that renovations are a common way homeowners are using their home equity, they’re not the only smart reason to borrow. Paying down high-interest debt, funding a vacation, paying medical bills, starting a business, and paying off student loans are all common potential uses.

Because both the amount you can access and the repayment terms depend on the financing you choose, it’s important to evaluate your goals and monthly budget before borrowing. Options like HELOCs and home equity loans typically come with monthly payments, so choosing the right structure, and borrowing only what you need, can help keep your plan aligned with your broader financial health.

Myth #4: You can borrow 100% of your home equity

Something that may come as a surprise is that most lenders will not allow you to access all of your equity. Instead, they set maximum loan-to-value limits that cap how much you can borrow against your home.

As you compare options, you’ll likely see the term OLTV, which stands for outstanding , or the total balance you currently owe on your mortgage(s) divided by your home’s current value. You may also see , which includes your existing mortgage balance plus the new home equity borrowing when lenders determine your borrowing limit.

In many cases, lenders want your CLTV to stay under about 80%–85%, but some products and lenders use more conservative caps (sometimes around 75% or lower) depending on the property type, loan size, credit profile, and income.

It’s also smart to keep a buffer of unborrowed equity to protect your investment and lower your leverage risk.

Myth #5: Only long-term homeowners can access their equity

Another common misconception is that you must own your home for decades before you can use your equity. However, equity exists any time your home’s value exceeds your mortgage balance, which can be true even in early ownership.

Always review your specific loan structure and home value. If you made a significant down payment or if your property has appreciated since purchase, you may have usable equity sooner than you think.

Myth #6: Accessing home equity won't affect your credit score

Generally speaking, taking out a traditional home equity loan or HELOC will impact your credit profile as it increases your overall debt load, can influence your utilization rate, and will show up on your credit report.

Most traditional equity financing options come with monthly payments, and missing a payment on your HELOC or home equity loan can harm your credit score in the same way as any other debt.

While alternative options, such as , can provide you with access to your equity without monthly payments, it's always a good idea to consult a financial advisor or other expert if you’re trying to determine which option is right for you.

Myth #7: Home equity loans and HELOCs are the same thing

Home equity loans and HELOCs, or home equity lines of credit, are different tools despite sounding similar.

A home equity loan gives you a lump sum at a fixed rate, whereas a home equity line of credit is a revolving line of credit that usually features a variable rate. HELOCs also typically have a , which can make monthly payments less predictable than a fixed-rate installment loan. These structures offer different payment stability and interest costs.

Myth #8: A home equity loan is the same as refinancing your mortgage

Home equity loans are not the same as refinancing your primary mortgage.

Cash-out refinancing replaces your existing mortgage with a new one and pays you the difference in cash. A home equity loan exists in addition to your existing mortgage. Refinancing can impact your interest rate and change your monthly payment, while a home equity loan leaves the original mortgage terms untouched.

Using home equity as a tool

Home equity can be a powerful , but only when it’s used with clear expectations and informed judgment. Whether you’re planning renovations, debt consolidation, or some major life expense, avoiding these common myths can help you steer clear of costly financial decisions.

If you’re considering leveraging the equity you’ve built in your home, determining your home’s value, understanding current interest rates, and comparing your options can help you maximize the value of your home.

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