Home Equity Loans Pros and Cons

A review of a home equity loan's pros and cons can help you make a more informed decision about whether a home equity loan is a good financial decision for your particular situation.

Review the basics of home equity loans.

A home equity loan is a way for a homeowner to use their home equity as collateral for a loan. The greater the equity in the home, the larger amount the lender is usually willing to lend.

Most lenders offer two types of home equity loans:

• Home Equity Loan – This is an installment loan where the homeowner borrows a specific amount of money for a specific amount of time (such as 10 years or 20 years.) The homeowner repays the loan by making monthly payments of a specific amount. Since the home is used as collateral for the loan, lenders often feel that a home equity loan is a less risky loan to make than other types of loans, such as car loans or other personal loans. Their perception of lower risk usually results in a lower interest rate on a home equity loan than the interest rates on other types of loans.
• Home Equity Line of Credit – This is a revolving line of credit similar to a credit card account. The homeowner is approved for a specific amount of money to be available for the credit line. The homeowner can write checks or use a card to access the available credit line. As the homeowner repays the amount they borrowed, the repaid credit is made available again for borrowing by the homeowner. The repayment and check writing aspects of this type of loan make it very convenient for the borrower.

Home equity loans can be an excellent way to put equity to work. They are often used to provide funds for projects that will provide greater value in the future such as:

• Home improvement projects which might, in fact, increase the value of the home
• College expenses that can improve the future of a family member

Borrowers should be aware that they run the risk of losing their home if they fail to make the required payments on a home equity loan. Before a homeowner risks their home they should review the pros and cons of home equity loans.

• Interest rate – The home equity loan usually has a lower interest rate than unsecured lines of credit such as personal loans and credit cards
• Tax advantages – The interest paid might be tax deductible. Be sure to consult your tax professional to see what deductions you might be able to take on your tax return.
• Refinancing options – The home equity loan can be refinanced. A home equity loan can also be combined into a new first mortgage to achieve a lower interest rate on a new loan that combines both prior loans.
• Line of credit option – Many lenders provide a home equity line of credit. The line of credit feature provides the borrower with convenient access by check and gives the homeowner the option to only borrow the exact amount of funds they need over a specific timeframe.

• Your home is at risk – Lenders can take your home if you fall behind in the payments on a home equity loan.
• High fees – A home equity loan may have higher fees and closing costs than other mortgage loans, although some equity loans do not include any closing costs at all.
• No way to stabilize your equity – if the value of the home decreases, the homeowner could end up owing more on the home equity loan than their home is worth.
• No guarantee of full access to line of credit – Lenders can freeze or reduce the line of credit based on a downturn in the homeowner's credit history or if there is a reduction in the value of the home.

A home equity loan can be a very convenient way to access the equity in your home to meet your financial needs. Be sure to learn the home equity loan's pros and cons before you make a final decision about whether a home equity loan is your best financial decision. Remember: You could lose your home if you are unable to repay the loan.

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