Home equity loans allow you to borrow money against your home’s equity. They are a type of second mortgage and are often used for funding important goals like your child’s college tuition or a home improvement project.
Let’s take a closer look at the pros and cons of acquiring a home equity loan so you can make an informed decision.
Pros of Acquiring a Home Equity Loan
The benefits of a home equity loan are:
Lower Interest Rates
Compared to unsecured loans, such as personal loans and credit cards, home equity loans typically offer a lower interest rate. Since lenders utilize your home as collateral, the risk decreases, leading to lower interest rates.
Fixed Interest Rates
Home equity loans feature a fixed interest rate throughout the loan term, regardless of market fluctuations. You’ll know exactly how much you will be paying. This is also how home equity loans differ from a home equity line of credit (HELOC). In HELOC vs home equity loan, the former has a variable interest rate, leading to unpredictable monthly payments.
Consistent Monthly Payments
Since the interest rate is the same throughout the loan period, you will be able to make consistent monthly payments.
Large Borrowing Potential
Personal loans and credit cards often have a rather conservative borrowing limit. In comparison, a reliable lender like AmeriSave offers a favorable borrowing potential. You can take five- and six-figure sums and use them for crucial expenses.
Tax Benefits
Have you ever wondered why many homeowners use home equity loans for funding home improvement projects or repairs? The answer is potential tax benefits! According to the IRS, the interest you pay on a home equity loan may be tax-deductible if the loan is used to “buy, build, or substantially improve” your primary or secondary home
Cons of Home Equity Loans
Unfortunately, there are some disadvantages to acquiring a home equity loan. Here’s a closer look:
Strict Eligibility Requirements
Securing a home equity loan isn’t as easy as it sounds. For one, most lenders require you to have at least 15 to 20% of the home’s appraised value. Moreover, lenders require borrowers to have a good credit score.
Risk of Foreclosure
The biggest con of acquiring a home equity loan is the risk of foreclosure. Since your home was used as collateral, the lender has the legal right to foreclose on your home to pay off existing debt. Foreclosure can permanently damage your credit score, making it difficult for you to acquire other debts.
Another Debt Added
Despite the numerous benefits of a home equity loan, it’s still a debt added to your spreadsheet.
Possible Negative Equity
Imagine the value of your home decreases after getting a home equity loan. You’ll end up paying more than what your house is worth, a phenomenon called an underwater mortgage.
Additional Costs
Home equity loans come with additional costs, such as origination and appraisal fees. These costs can quickly add up, straining your budget.
