9 myths about home equity: What homeowners often get wrong

Published in House and Home on Sunday, August 24th 2025 at 10:59 GMT by news4sanantonio
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Home‑Equity Myths Debunked: What Every Homeowner Should Really Know

When the price of a home rises, the first thing that comes to mind is “I’ve built up equity.” It’s a headline that feels good, but it also tends to sow confusion. How much can you actually borrow? Do you get a low‑rate loan simply because your house is worth more? What will the tax implications be? And how do you avoid turning your cozy home into a financial liability?

A recent piece on News4San Antonio – Myths About Home Equity: What Homeowners Often Get Wrong – digs into the most common misconceptions, pulls in advice from mortgage experts, and offers a practical checklist for those looking to tap into their home’s value. Below is a concise but comprehensive summary of the article, with added context from related links and industry sources.

1. Equity Is Not an Instant Cash‑Box

Myth: The higher your home’s market value, the more “free” cash you can access.

Reality: Equity is the difference between what you owe on your mortgage and the current appraised value of your home. While a higher market price does increase your equity cushion, it does not instantly translate into liquid cash. The loan you can actually obtain is governed by a loan‑to‑value (LTV) ratio—most lenders allow a maximum of 80% LTV for a second mortgage or a line of credit, which means you can borrow up to 80% of your home’s worth minus what you still owe on the first mortgage.

For instance, if your house is appraised at $400,000 and you owe $200,000 on your primary mortgage, you have $200,000 in equity. An 80% LTV ceiling would let you borrow $160,000 (80% of $400,000), leaving a $40,000 cushion before hitting the limit.

2. Low Interest Rates Are Not a Guaranteed Feature

Myth: A home‑equity loan automatically comes with a lower interest rate than a credit card or personal loan.

Reality: While many home‑equity products do carry lower rates—especially fixed‑rate loans—this is not a universal rule. Rates are affected by your credit score, the type of equity product, and market conditions. In some cases, a variable‑rate Home Equity Line of Credit (HELOC) may begin with a low introductory rate that spikes later. A quick look at the “Home Equity Loan vs. HELOC” comparison (link from the article) shows that HELOCs often have a higher ceiling but can be more expensive over the long haul if the market rates rise.

3. Borrowing Limits Are Not “Any Amount You Want”

Myth: If you have a lot of equity, you can borrow unlimited amounts for any purpose.

Reality: Lenders impose strict caps on how much you can borrow. For a HELOC, the maximum credit line is often a percentage of your home’s appraised value (again, typically 80% LTV). A cash‑out refinance allows you to replace your existing mortgage with a new one at a higher balance, but the total amount borrowed must stay within the LTV ceiling set by the lender and regulatory guidelines.

Additionally, borrowing beyond these limits could trigger higher interest rates, loss of tax‑deductibility for the loan interest (as per IRS rules for 2023), or even a foreclosure risk if you’re unable to keep up with payments.

4. Tax‑Deductibility Is Not Guaranteed

Myth: All home‑equity borrowing is tax‑deductible, just like mortgage interest.

Reality: The Tax Cuts and Jobs Act of 2017 tightened the rules. In 2023, only interest on loans used to buy, build, or substantially improve the home can be deducted. Money borrowed to pay for a vacation, a new car, or education expenses will not qualify. The article cites the IRS “Home Equity Loan Interest Deduction” FAQ for readers to verify current regulations.

5. Home Equity Is Not a “Safety Net”

Myth: A line of credit gives you a financial safety net that can cover all unexpected expenses.

Reality: While having access to a line of credit can provide a cushion, it is still a debt that accrues interest. Overleveraging—taking out a large amount relative to your income or taking on a HELOC when you’re already close to your debt‑to‑income (DTI) limit—can put you at risk of default, especially in a rising‑rate environment. A practical tip from the article: keep your DTI below 43% and your credit utilization below 30% on all revolving accounts.

6. Home Equity Isn’t a “Get‑Rich‑Quick” Tool

Myth: You can invest borrowed equity into other assets and instantly boost your net worth.

Reality: Borrowing against your home should be a strategic, short‑term financing tool—not a means to gamble on the stock market or real‑estate flip schemes. Unless you have a proven business plan or a low‑risk investment with a guaranteed return that exceeds the cost of borrowing, you’ll likely end up paying more in interest than you gain.

How to Make the Most of Your Home Equity

Get a Professional Appraisal
An accurate appraisal is the bedrock of any equity transaction. It sets the baseline for your LTV calculation and informs the lender of your borrowing limit.
Shop Around for Rates
Even a 0.5% difference on a $100,000 line of credit translates to $500 per year. Compare HELOCs, home‑equity loans, and cash‑out refinances from multiple lenders—including online platforms and local credit unions.
Use a “Hard” Credit Check
Most lenders will run a hard inquiry. Keep these inquiries within a short window to minimize impact on your credit score.
Consider a Fixed‑Rate Home‑Equity Loan
If you plan to use the funds for a large, one‑time expense—such as a major renovation—locking in a fixed rate can provide peace of mind and predictable payments.
Plan for the Long Term
A HELOC can be advantageous for an ongoing project (e.g., a home‑renovation loan). However, you’ll want to keep an eye on variable rates and set a repayment schedule to avoid being caught off‑guard by a rate hike.
Keep Your Insurance Up‑to‑Date
A higher mortgage balance often triggers higher homeowners insurance premiums and may affect the coverage limits required by your lender.
Consult a Financial Advisor
A seasoned advisor can help you weigh the costs and benefits in the context of your overall financial plan—particularly if you’re using the equity to fund education, a business venture, or to refinance other high‑interest debt.

Bottom Line

Home equity is a powerful resource, but it’s not a free, risk‑free source of cash. The article from News4San Antonio provides a clear-eyed look at what homeowners need to ask themselves before tapping into the value of their property. By understanding the limits of LTV, the nuances of interest rates, the tax implications, and the importance of responsible borrowing, you can use your home’s equity as a smart lever—rather than a liability.

If you’re thinking about a HELOC, home‑equity loan, or cash‑out refinance, start with a detailed inventory of your current debt, project your future expenses, and get a side‑by‑side rate comparison from at least three lenders. And remember: the best financial decisions are often those that keep your house in good shape, your debt in check, and your future flexible.

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