3 home equity loan mistakes to watch for this May

Homeowners considering a home equity loan should familiarize themselves with some costly mistakes worth avoiding this May. Getty Images

Home equity loans have traditionally been one of the more affordable ways to borrow a large sum of money. But in the interest rate climate of recent years, they've been one of the only ways to do so. As credit card interest rates surged to a record high last year, home equity loan rates actually declined. And with personal loan rates now over 12%, on average, home equity loan rates are materially lower at just 8.36% for qualified borrowers. Additionally, with tax advantages, the latter two options don't come with and an elevated average home equity amount hovering over $300,000 now, home equity loans are one of the preferable ways to borrow a large amount of money at an affordable rate right now.

That all noted, home equity loans and their home equity lines of credit (HELOCs) counterparts use the home as collateral in these borrowing exchanges. If you're unable to make your repayments as agreed upon, you could risk losing your home back to the lender. So you must calculate your repayments with precision before getting started. And it's important to know some timely, but potentially costly, mistakes to avoid in the unique economic climate of May 2025. Below, we'll detail three home equity loan mistakes borrowers should watch for (and avoid making) this May.

Start by seeing how much home equity you could borrow here.

3 home equity loan mistakes to watch for this May

To maximize their chances of home equity loan borrowing success this month (and in the months and years ahead), prospective borrowers should know which timely errors to avoid. So, if you're looking to borrow with a home equity loan, this May:

Don't: Assume rate declines will continue

Home equity loan rates declined for much of 2024 and continued to dip in the opening months of 2025. But that decline has been gradual and rates haven't dropped nearly as significantly as they have, for example, on HELOCs. A 15-year home equity loan interest rate, based on historical Bankrate data, was 9.08% in January 2024. Now that rate is 8.42%. 

And while a lower rate is always preferred, that drop and trend for future declines isn't so significant that it's worth waiting for additional rate reductions to come. Not only will that delay the financing needs you already have, but it could be risky to do if any of the factors that have driven home equity loan rates lower suddenly reverse course. Instead, it's better to lock in today's low home equity loan rate while available, secure the financing, and look to refinance when rates drop considerably again in the future.

Get started with a low-rate home equity loan online today.

Don't: Avoid monitoring the market

If you're looking to secure the lowest home equity loan rate possible, then it behooves you to monitor the market closely for a timely opportunity to act. Home equity loan rates change often, influenced by multiple market conditions and data points, ranging from the inflation rate to the federal funds and prime rates to the central bank's monetary policy. 

Individually or in combination with one another, these factors are strong enough to drive home equity loan rates up or down, sometimes in the same week. And with a new Fed meeting set for May 6 and May 7 (there was no Fed meeting in April) and a new inflation reading scheduled for release on May 13, there are plenty of influencing factors at play this month. So, pay close attention to the market for a timely opening to exploit.

Don't: Have your documentation missing

Because rate declines may not continue unabated and because the market conditions can easily make a home equity loan rise or fall, it's important to have your documentation ready to take advantage when an opportunity arises. You can, in theory, lock a low home equity loan rate when found, but you'll need to be prepared to do so. 

It makes sense, then, to gather the documentation you'll likely need in advance, so you're one step closer to locking a low rate when made available. And, while you're gathering your paperwork, be sure to understand how your credit score can impact any rate offers. If your score isn't good, it may make sense to take steps there to improve it before applying for the loan.

The bottom line

A home equity loan is a secure and reliable way to borrow money in today's economy, but it will require a strategic and, sometimes, nuanced approach. By avoiding these timely mistakes this month, homeowners can improve their chances of securing a low-rate home equity loan, setting themselves up for long-term borrowing success. Just don't wait too long to act, either. With rates low now and the projections of the interest rate climate varied, many would benefit from locking a rate now before potentially refinancing in the future.

Learn more about your current home equity loan options here.

Matt Richardson

Matt Richardson is the senior managing editor for the Managing Your Money section for CBSNews.com. He writes and edits content about personal finance ranging from savings to investing to insurance.