Pros and Cons of Home Equity Loans
When you apply for a home equity loan the lender requires that your home be used as collateral. This type of loan is considered a second mortgage.
Decline in Home Values
Some homeowners have had a difficult time qualifying for home equity loans during the credit crunch because of falling home values. But if you have good credit and a decent amount of equity, there is a chance you can get approved to borrow money.
It’s never a good idea to borrow money if you don’t need to. But if you are house rich and cash poor, a home equity loan can be useful if you need to make home improvements, pay college costs, or even consolidate high-interest debt.
When considering a home equity loan keep in mind the following pros and cons. Pros include:
- Home equity loans usually have much lower interest rates than credit cards and rates are often fixed.
- Interest paid on home equity loans is tax deductible.
- Depending upon how much equity you have you may qualify for a sizable amount of money.
Among the cons of getting a home equity loan are:
- If your property values declines significantly, you could end up owing more on your mortgages than your home is worth. This is commonly referred to as being upside down on a mortgage.
- Borrowing money by using your home as collateral is risky. If you can’t afford to keep making payments on a home equity loan, you could end up losing your property.
Access to a Line of Credit
Keep in mind that home equity loans differ from home equity lines of credit (HELOCs). A line of credit also allows you to tap into your home equity, but it is set up so you can draw on the money as you need it instead of taking a lump sum. Both home equity loans and HELOCs usually have shorter terms of repayment than first mortgage loans.
Tighter Lending Standards
Some people who were previously approved for HELOCs have had their lines of credit frozen because banks have tightened up on lending. In other cases people who have strong credit histories have been denied HELOCs because banks are reluctant to extend credit.
Shop around to compare home equity loans to find the best deals. Familiarize yourself with all the terms before signing up.
Tags: home equity loan, home equity loans, mortgage, mortgage loan
