Home equity loans allow families to borrow extra cash through the value of their home. Many use the loan for renovation projects that will boost the property value, to pay for college, or to help pay down some debt.
A home equity loan tends to be a popular option for many as it’s usually simpler to access this loan than going for other conventional loans. That’s because your house becomes the security for the loan. Even if your credit score isn’t high, you can still access a home equity line of credit with bad credit.
You can look at a home equity loan like a second mortgage, only if you have enough equity in your house. There are two options – you either take out a large lump sum of money, or open up a home equity line of credit (HELOC).
If you’re considering borrowing against your home’s equity, you’ll want to weigh out the pros and cons first.
Benefit #1 – Lower, Fixed Rates
Although not always the case, most home equity loans have a fixed interest rate that is lower than consumer loans and credit cards. A fixed rate is usually easier to work with as you know what your monthly payments will be each time. Also, you know that with a fixed rate, the price of your loan will never increase.
Benefit #2 – Lump Sum or HELOC
Having two options to choose from when using your home’s equity is a significant advantage depending on your situation. If you need a large amount of money quickly, you can borrow a large lump sum of money from your home’s equity.
Say you’re doing renovations though and will need money over a few months, the HELOC option allows you to access the funds whenever you need it.
Benefit #3 – Possible Tax Deductions
Another benefit of a home equity loan (depending on what you use the money for), is the possibility of tax deductions on the interest paid. If you’re using the loan for home improvements that increase your property value, that could make you eligible for tax deductions. You’re best to speak with your account however to see if you qualify.
Drawback #1 – Home is Collateral
Although using your property as collateral allows you to have lower interest rates, it does pose a serious risk if you default on your loan. If you find yourself unable to pay back your home equity loan, the bank could end up taking your house away, since it’s the collateral for the loan.
Drawback #2 – Fixed Rates
Although having a fixed rate typically has many benefits, there are a few drawbacks to it. If the interest rate trend starts to decrease significantly, you now have a loan that has higher interest rates than the countries average. You then end up paying more money for the loan.
Drawback #3 – Another Loan
As with any loan, the more you take out, the more it puts you into debt. Borrowing against your home’s equity is another loan, which means that’s an additional monthly payment to worry about. If you don’t have the money right now and are looking at a home equity loan, will you have the money in the future to pay it off?
Before you decide on a home equity loan, seriously consider the benefits and drawbacks. Make sure the benefits outweigh the disadvantages so that you don’t find yourself in a situation of potentially losing your home.
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