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More homeowners are considering home equity loans in 2025 as interest rates have settled around 8.23%. While that’s still above the rates of recent years, it beats paying over 20% on credit cards or an average of 12.47% on personal loans.
With household debt at high levels, tapping home equity is tempting — but it’s not always wise. This raises a critical question: When does your existing debt load make a home equity loan too risky or impossible? We asked three industry professionals to share their insights. Below, they explore the signs you may be overextending and offer advice on how to set yourself up for successful home equity borrowing.
Start by seeing how much home equity you could borrow here.
How much debt is too much for a home equity loan?
There’s no single formula for figuring out how much debt is too much for home equity borrowing. However, experts, including Christopher L. Stroup, a certified financial planner and president of Silicon Beach Financial, warn that attractive rates can lure borrowers into taking on excessive debt. “At a certain point, [more] debt could tip the balance between manageable and unsustainable, especially if your income or home value shifts,” he cautions.
When considering a home equity loan or a home equity line of credit (HELOC), experts recommend examining your entire financial picture — not only the interest rate. The following indicators may hint that a home equity loan is too risky or untenable:
High debt-to-income (DTI) ratio
Most home lenders want to see your debt-to-income (DTI) ratio at 36% or lower. “[But] some will go up to 43% if you have a high credit score, strong down payment and stable employment,” says Pahmela Foxley, vice president of mortgage lending at Wasatch Peaks Credit Union.
According to Steven Glick, director of mortgage sales at real estate investment fintech company HomeAbroad, a DTI ratio above 43% is a big red flag. “If you’re spending nearly half your income on debt already, adding a home equity loan payment could strain your budget to the breaking point,” he explains. Keeping the ratio below 36% will allow you more flexibility should surprise expenses arise.
Check your home equity loan qualifications here now.
Low credit score
“A credit score below 680, especially under 620, screams risk to lenders,” says Glick. It may point to past debt management challenges that have not been addressed or resolved.
Beyond making approval harder, Stroup points out that a low credit score will drive up your interest rate. If your score is below 620, improve it before applying for a home equity loan. Pay down credit card balances and make all payments on time for several months to qualify for better rates.
Low home equity
Lenders often ask for at least 20% equity in your home. “If you’ve got less — say only 10% — a market dip could leave you underwater, owing more than your home’s worth,” Glick explains.
If you’re close to the 20% threshold, consider building more equity before applying. In the meantime, paying more toward your principal can help shrink your mortgage balance faster. You may also complete strategic home upgrades to increase your property’s value.
Unstable income
“If your income fluctuates [a lot] or you’ve recently changed jobs, lenders get wary,” Glick warns. Stroup agrees, noting that red flags include job hopping, recent career pivots or highly seasonal earnings. “Even a high income doesn’t mean stability if it’s unpredictable,” he emphasizes.
W-2 employees with steady salaries have the easiest path to approval, while self-employed borrowers or commission workers face more scrutiny. If your income varies by more than 20% month-to-month, establish consistency for at least two years before considering a home equity loan.
Lack of an emergency fund
“Lacking an emergency fund signals you’re borrowing from a place of financial fragility,” Stroup says. Since home equity loans put your house at risk, you need a cash cushion in case of job loss or medical emergencies.
Experts advise saving at least three to six months of living expenses before taking out a home equity loan. And if you’re self-employed, you should aim even higher. “Six to 12 months is recommended,” notes Foxley.
The bottom line
Taking out a home equity loan can be smart, but it requires honest self-assessment. First, ask yourself: “What’s my backup plan if circumstances change?”
Glick suggests assessing your full debt picture and planning for the worst-case scenario before borrowing. If you’re not ready yet, focus on improving your financial position. Pay down high-interest debt, build your emergency fund and boost your credit score. Strengthening these fundamentals now could save you from putting your home in jeopardy.
