What Are the Advantages and Disadvantages of a Home Equity Loan?

November 1, 2019
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Paul Petersen
Posted in Finance
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Your home equity is the market value of your home minus the mortgage payments you still have left. It can be one of the largest sources of net worth for many property owners. Over time, the value of your property should increase, which means your equity increases as well. With a home equity loan, you use your home’s equity as collateral and borrow against it. There are different advantages of home equity loan money.

Advantages of Home Equity Loan Money

When considering getting home equity loan money, there are some advantages to consider.

Fixed Rate: These loans usually have a fixed interest rate that is lower than a credit card or other secured consumer loans. In the changing environment, a fixed-rate loan can give you simplicity in budgeting since your monthly payment will remain the same over the life of the loan and won’t increase. The interest rate is usually lower than other loans because it is a secured loan and your home is put up as collateral.

Lump Sum: You get the money you borrow from a home equity loan in a lump sum. This gives you more flexibility to cover any larger expenses. You will pay back the loan with a regular monthly payment that goes toward the interest and principal.

Tax Deduction: You may be able to get a tax deduction for the interest you pay on a home equity loan if you use the money for home renovations.

Disadvantages of Home Equity Loan Money

You Could Lose Your Home: If you fail to repay the loan then you could lose your home to the lender or financial institution. You need to make sure you choose wisely before you decide to apply for a home equity loan.

Could Go Deeper into Debt: Home equity loan money can be an easy way to pay off loans, but it could sink you into further debt if you take out a second loan to pay off the first loan.

Not Making Smart Financial Decisions: You should be careful about what you use the money for with this loan. If you are using it to start a business where the chances of success are low to moderate, you should find other forms of financing, so you don’t lose your home. Your child’s education can be a good reason to tap into equity but if you are nearing retirement then you may not want to consider this option since you may not have a way to repay the debt you are taking on.

Is a Home Equity Loan Right for You?

If you can be a responsible borrower with a reliable and steady income, this type of loan can be a good option since it gives you flexibility with larger expenses.