Advantages of Home Equity Loans

Home equity loans are attractive to borrowers for a few main reasons:

  1. They typically have a lower interest rate (or APR)
  2. They are easier to qualify for if you have bad credit
  3. Payments on a home equity loan may be tax deductible
  4. Borrowers can get relatively large loans with this type of loan

A home equity loan may help one to consolidate their several debts. It is more convenient for home-owners to transform their various debts into a single one by taking out a home equity loan. This way, instead of spending time with a number of different loans, one will only have to deal with a single contract with a single payment and deadline per month. It is more convenient, more time-saving, and one may even negotiate better terms for the new contract.

It can be said that the two major advantages of borrowing with a home equity loan are lower interest rates and potential tax savings:

  • The interest rate you will pay on the average home equity loan is generally lower than the interest rate you will pay on the average credit card or any other type of non-secured debt.
  • For home equity loans, you can generally deduct the interest you pay. The interest you pay on credit cards and other types of personal loans is generally not tax-deductible. Consult your tax advisor about the deductibility of interest.

Home-equity loans are thus somewhat of a dream come true for a lender, who, after earning interest and fees on the borrower’s initial mortgage, earns even more interest and fees. If the borrower defaults, the lender gets to keep all the money earned on the initial mortgage and all the money earned on the home-equity loan; plus the lender gets to repossess the property, sell it again and restart the cycle with the next borrower. From a business-model perspective, it’s tough to think of a more attractive arrangement.

Disadvantages of Home Equity Loans

Before using a home equity loan for any purpose, you should be aware of the pitfalls of these loans. The main thing is that you can lose your home if you fail to meet the payment schedule required by the loan.

The primary disadvantages of home equity loans is that since these loans are secured loans, so one’s own home will act as collateral. Thus, if the borrower cannot meet certain loan-terms, the lender can legally repossess that property. Therefore home equity mortgage-loans require a serious reconsideration before being taken out. This implies that one needs to make a detailed calculation regarding one’s personal finances, and see whether he/she will be able to afford the monthly instalments needed for the home equity loan.

Another pitfall may arise when homeowners take out a home-equity loan to finance home improvements. While remodeling the kitchen or bathroom generally adds value to a house, improvements such as a swimming pool may be worth more in the eyes of the homeowner than the market determining the resale value. If you’re going into debt to make cosmetic changes to your house, try to determine whether the changes add enough value to cover their costs.

Thus, one of the main disadvantages of home equity loan is the danger of losing your favorite home when you default. Lenders do not care much because they are back on the closure of the building. Therefore, the borrower is not advisable to do so much in his debt. Home equity loan is also not useful for people who start their careers, because they can not easily move their position if they have a responsibility. However, people close to retirement can also manage the long-term home-equity loan. Home equity loans, borrowers must keep in mind that the longer the repayment schedule to pay more interest. Add, if you’re unhappy at home slashes prices down and if you have to sell the house, it is a loss.

What is a Home Equity Loan?

A home equity loan is a form of credit for which your home is pledged as collateral. Generally, home equity loans offer a fixed interest rate and a fixed monthly payment. A standard home equity loan (also called a second mortgage) is paid off over an extended period of time. Home equity loans allow a [...]

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How to Get a Home Equity Loan

A home equity loan allows you to tap into the equity in your home to pay for improvements, education, a car, a vacation – it’s up to you. And the best thing is, the interest is tax deductible. There are a number of steps that you should follow in order to make sure that you [...]

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Home Equity Line of Credit

A home-equity line of credit (HELOC) is a variable-rate loan that works much like a credit card and, in fact, sometimes comes with one. Borrowers are pre-approved for a certain spending limit and can withdraw money when they need it via a credit card or special checks. Monthly payments vary based on the amount of [...]

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How to Use a Home Equity Loan

In these shaky times, some experts advise that homeowners actually take money out of their line of credit, or get a home equity loan, even before they need the cash. This is because in the past, as long as you had equity in your home, you could draw on it in the form of a [...]

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