A home equity loan allows homeowners to convert a portion of their homeownership into cash by borrowing against the equity in their home. Like any financial product, home equity loans have their own set of pros and cons. Here are some of the key points to consider:
Pros of Home Equity Loans:
Fixed Interest Rate: With a home equity loan, you’ll typically have a fixed interest rate. This means that the interest rate you sign up for is the interest rate you’ll pay over the life of the loan .
Lower Interest Rates: Home equity loans often come with lower interest rates compared to other forms of debt, such as personal loans or credit cards.
Large Sums of Money: Home equity loans can provide easy access to large sums of money that may not be available through other avenues .
Possible Tax Deduction: If you use the funds from a home equity loan to build, buy, or make substantial improvements to your qualified residence, you may be able to deduct the interest you pay on the loan on your annual tax return .
Cons of Home Equity Loans:
Foreclosure Risk: When you take out a home equity loan, your home serves as collateral. If you default on the loan, you may face foreclosure on your home .
Lump Sum Payment: Home equity loans provide a lump sum payment, which means you may end up borrowing more than you actually need. This can lead to spending the excess money frivolously and potentially eroding your home’s value .
Fees and Closing Costs: Home equity loans may come with fees and closing costs, which can add to the overall cost of the loan .
Limited Flexibility: Unlike other forms of financing, home equity loans may have limited flexibility in terms of repayment options.
Two Mortgage Payments: A home equity loan is considered a second mortgage, which means you’ll have to make two monthly mortgage payments – one for your original mortgage and another for the home equity loan .