A home equity loan is a great way to leverage your home’s value to access funds at relatively low interest rates. However, using a home equity loan also means that you’re using one of your most valuable assets — your home — as collateral. So, before you decide to pursue one, it’s essential to understand this type of financing’s potential consequences.

Here, we’ll tell you everything you need to know about home equity loans so you can make the best decision for your own unique circumstances. Let’s get right to it!

What is a Home Equity Loan?

A home equity loan, alternatively referred to as a second mortgage, allows you to access extra cash by borrowing money against your home’s equity. Equity refers to the difference between how much you owe on your original mortgage and your home’s value.

Home equity loans have a fixed interest rate and their terms range from five to thirty years or longer. Interest rates for home equity loans are usually favorable because they’re secured against your home. That makes it a safer bet for the lender.

When you receive the loan, it comes as a lump sum that you’ll repay in addition to your current mortgage. This is in contrast to a home equity line of credit (HELOC), which you can use like a credit card, accessing credit as needed.

Advantages and Drawbacks of Home Equity Loans

Home equity loans can have a number of advantages when used wisely.

Advantages of Home Equity Loans

  • Fixed interest rates: Fixed interest rates hold steady regardless of market fluctuations. This is a huge advantage, as it means your payments will remain predictable even if federal interest rates rise. This makes it much easier to budget for your expenses and stick to a plan.
  • Lower monthly payments: With repayment periods of up to 30 years, home equity loans often have affordable monthly payments.
  • Tax benefits: Depending on your state’s tax laws, your loan’s interest may be tax-deductible if you use the loan to renovate or repair your home.
  • Lump-Sum Financing: Since the loan comes in one lump-sum payment, you can use the money to clear significant expenses and pay back in friendly installments over time. This is particularly useful if you plan to use a home equity loan to consolidate debt.

While home equity loans have great benefits, they’re not without risks. Let’s take a closer look at their drawbacks.

Drawbacks to Home Equity Loans

  • Risk of foreclosure: Failing to repay your loan could lead to foreclosure, displacing your family and crushing your credit score.
  • Closing costs can be costly: Most home equity loans have closing costs of between 2% and 6%. Additionally, you may incur other costs such as appraisal, attorney, notary, and origination fees. All these can increase the total borrowing expenses.
  • Credit score risk: Like any form of credit, misusing your home equity loan can damage your credit score. This makes you appear more risky to lenders, which can make it harder for you to borrow in the future, and make borrowing more expensive.
  • Time: It can take as long as two months to get a home equity loan. If you need access to money fast, waiting that long might not be an option for you.

Factors to Consider Before Getting a Home Equity Loan

Before you apply for a home equity loan, consider the following factors:

  • Your current equity: The more equity you have, the more you can borrow. If your equity falls below 10%, you may find getting a loan at favorable interest rates challenging.
  • Financial stability: If you had financial difficulties before your home equity loan, assuming you’ll be in a better position with more debt may be unrealistic. Make sure you have the habits and plans in place to successfully repay your loan without damaging your credit score.
  • Whether you qualify: Your current equity, your credit score, your debt-to-income ratio, and your income can all impact whether you’ll be approved for a loan. Lenders will perform a hard credit check when you apply which can cause a temporary drop in your credit score. Therefore, make sure you qualify before you apply.

Here’s When a Home Equity Loan might be a Good Idea

A home equity loan might be a great option, particularly in situations such as:

For Home Improvements: Upgrading your bathroom or kitchen or installing a new roof or floor gives your home a higher resale value should you opt to sell. Additionally, the loan’s interest could be tax-deductible depending on your state.

Consolidating High-interest Debt: Home equity loans can turn high-interest debts into one manageable monthly payment.

Covering Major Expenses: Home equity loans are commonly used to cover significant medical or educational expenses.

Alternatives to Home Equity Loans

If you can’t access a home equity loan, other funding options include:

Personal Loans:

Personal loans can be useful if you need to borrow less than a home equity loan would give you. They’re less risky because they’re not secured against your home, but the interest rates are typically higher.


Refinancing allows you to access a larger loan to repay the first mortgage and keep the difference. You may end up with a lower interest rate and only have one payment.


A home equity line of credit is flexible and can be a good alternative to a home equity loan if you anticipate recurring or fluctuating costs over a longer period of time.

SKYDAN’s sale-leaseback program:

While home equity loans, HELOCs, refinancing, and personal loans are useful, they all have the same problems: restrictive qualifying criteria, expensive terms, and above all, they’re more debt. SKYDAN’s sale-leaseback program offers a refreshing alternative. Here’s how it works:

Say you have debt that you want to pay off. You don’t have the money to do that right now, but you do have equity in your home. So, you sell your home to SKYDAN and immediately start leasing it back. This gives you access to the equity in your home, allowing you to access the cash you need and stay in your home. Then, you continue leasing your home and eventually have the option to buy it back or move.

With SKYDAN’s residential sale-leaseback solution, you could have cash in hand in less than a month. That’s twice as fast as home equity loans and cash-out refinancing. Not only are sale-leasebacks fast, but you may be able to access more cash than with traditional borrowing methods. This is because you’re tapping the equity in your home through a sale, not taking out a loan.

Do the Banks Keep Saying No? SKYDAN Says Yes

For too many homeowners, essential financing options are out of reach due to strict eligibility requirements. In this world where your options seem limited to expensive loans and additional debt, a residential sale leaseback program like SKYDAN’s can seem too good to be true.

It isn’t. SKYDAN is different because we’re a real estate investment company — not a lender or a bank. That means we don’t care about:

  • Your income
  • Your credit score
  • Your payment history
  • Your debt-to-income ratio

All you need to qualify for SKYDAN’s program is equity in your home. But don’t take our word for it; check out our reviews to see why our customers call us “the real deal.” And if you’re ready for more good news, see if you qualify today!