In: Categories » Legal and finance » Loans and mortgages » Pros and cons of home equity loans
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What is a home equity loan? Practically, a home equity loan is a secured loan. As a simple explanation, the equity represents the difference between the amount owed with your mortgage and how much your home is in worth. Things to take care of when applying for a home equity loan If you intend to pay off the home equity loan too early, some loans get steep penalties and a typical penalty is the 10 percent of the total amount that has been borrowed. You have to make sure it does not exist any penalty enforced by the lender to prepay your home loan. You must take care to loans whose interest you are paying monthly and which are then hit with a huge payment up to the end of the loan term – so called the “balloon loans”. Try to avoid them. Advantages of home equity loans Speaking about advantages, here can be distinguished the tax benefits that are really significant with this type of loan. The interest paid on the equity loan may be tax-deductible while the closing costs and all additional fees for the loan are paid or can be rolled over into the loan itself. In order to avoid mistakes, try to consult with your tax advisor. The interest rates on these loans are competitive because of the reasons above. Disadvantages of home equity loans You get the risk to lose your home if you cannot make the monthly payments on a home equity loan and this is just as with the actual mortgage. If the value drops too much, you may finally owe more on your home than it is actually worth. If you intend to get a career change and a possible lower income due to the situation, then a home equity loan is not the right choice. And finally, one but not the last thing you may want to consider is a home equity line of credit rather than a home loan because the main advantage is: you are paying interest on the amount you use. For example, if you have a line of credit of $10,000 but you only use $4,000, then the interest must be only paid on the $4,000.
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