What is a Home Equity Loan – Its Advantages and Disadvantages

A home equity loan is a loan taken out with your house as a collateral. The value of a home equity is the difference between the current market value of your home and the mortgage amount you owe.

People take home equity loans for various reasons. The most common reason is of course a need to have certain amount of cash on hand for other purposes such as college education or home improvements.

Another common reason people consider to take a loan against the equity of their home is for debt consolidation. So instead of taking out a combination of personal loans, you will only have one single payment monthly. Every month you just need to remember one due date and the amount you need to repay. This can make your financial and budget planning easier.

As mentioned, many people also use home equity loans for repairing or improving their home. Home equity loan offers very good interest rate for home improvement. It also helps improve the value of your home by increasing the equity and writes off interest charges on your tax returns.

Whatever may be the reason, you need to be aware of the negative sides of a home equity loan. The first thing you must remember is that your house is used as collateral and hence failing to refund your loan can result in a foreclosure. In other words, you can lose your home if you fail to repay on timely basis.

Another disadvantage of home equity loans is rising interest rates. Most home loan rates change according to the economy situations. With a variable interest rate, your monthly payments may rise or fall. Make certain you know the cap on the interest rate. The cap is a deciding factor of how high your interest rate can increase each year as well as how much it can increase over the entire loan period. Also, make sure you ask the lenders about all possible fees. Lenders may charge you a variety of fees such as application and withdrawal fees.

The advantages of a home equity loan are low interest rates and the interest is tax deductible. It is also a fast and easy means of acquiring a sizable cash.

Before obtaining a home equity loan, take a good look at the market and economy situations. If the housing prices are falling, it’s not a good idea to opt for this type of loan because your home equity value will be low when the housing market value is falling.