Pros and Cons of Home Equity Loans


Authored by Jackie Barlow in Loans
Published on 10-13-2009

A home equity loan is enticing in these economic times. Realize, however, that you have to weigh the benefits of having the funds for a purchase against the hopefully unlikely possibility of losing your home. In future years if some devastating event makes it impossible for you to make the payment on that loan in addition to your mortgage, your home is at risk.

What is the difference between a home equity loan and a home equity line of credit? Both require you to use the equity in your home as collateral to insure that you will make your payments. They become a lien against your home. With the home equity loan, you receive the entire proceeds up front and make fixed payments for a certain period of time until the loan is paid. The line of credit is open-ended. You are approved for a particular total amount and can take advances when you need them until you reach the total that you are allowed.

What are the Pros for taking out a home equity loan?

  • With current low rates, and much lower interest rates than other loans, it could be a great way to pay off much higher interest debt, a college education, unexpected high medical bills, or do a major home improvement.
  • You can usually get your funds much quicker.
  • The choice of what to use the money for is your decision.
  • You can usually choose your time frame for payback, between 10 and 30 years.
  • If the amount of the equity loan is less than $100,000, it is exempt from the payment of taxes.

The Cons of a home equity loan to consider are:

  • The most important is the one already mentioned: the possibility of losing your home since it becomes the collateral to secure your loan.
  • You must seriously weigh how making these payments affects your budget and be assured that there will be no strain in making them.
  • Check to make sure that there are no penalties if you pay off the loan early. This can be an important consideration if, for instance, you were to suddenly inherit some money and wanted to decrease this debt.
  • Make sure these are fixed payments for the life of the loan with no “balloon payment” due at any time.
  • Ask what the fees and charges are for the loan to make sure they are not substantial. Also find out if you have to pay those up front or if they will be incorporated into the loan itself.
  • It does not pay to use a home equity loan for purchases that are really unnecessary or for daily spending expenditures if you are already having problems paying your bills.
  • If you want to or need to sell your home, because perhaps you have to move for a career change, you cannot consider negotiating a lower sale price. If you owe a substantial amount on your mortgage and equity loan, these must be paid off first.

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