Pros & Cons of Home Equity Loans

Home equity loans have become a popular way to get access to money quickly. Home equity loans are becoming more and more common as lenders try to entice borrowers with special promotions. While they can be beneficial under the right circumstances, they are not for everyone. Here are a few of the pros and cons associated with home equity loans.

Pros

Emergency funds- Home equity loans are a great source of funds in case of an emergency. You already have the equity built up and if you run across the need for money quickly, you might as well use. Many people have trouble saving money and this is a way to get around that. If you can't seem to save enough money for emergency funds, a home equity loan could be your next best option.

Low interest- Compared to other forms of financing, home equity loans have a relatively low rate of interest. The interest rate that they offer is much lower than using credit cards to finance large purchases. Therefore, they can save yu a substantial amount of money in the long run.

Tax deductible- The interest that you pay on a home equity loan is tax deductible. The only stipulations on this is that you have to be able to itemize your deductions and it only applies on a maximum of $100,000 loan. Other than that, you can realize a nice deduction on your income taxes and save some money.

Fixed payment- A home equity loan gives you the ability to budget for the payment easily. Most of the time, you will have a set payment for the life of the loan. Therefore, you will not have any fluctuating expenses as you would with other types of financing.

Cons

Fixed loan amount- One downside to the home equity loan is that you have to know exactly how much money you want to borrow on the front end. This means that sometimes you will not borrow enough money and sometimes you will borrow too much. If you borrow too much, most of the time, the money gets wasted on frivolous purchases.

Unwise purchases- Many lenders are advertising their home equity loans more and more. They promote them as a way to take a vacation, buy a big screen television, or do other things with. While you are welcome to do this if you want, it is the equivalent of taking an unnecessary risk. Do you really want to risk your house on a big screen television?

Overextend- Many homeowners have the tendency to overextend themselves with this type of loan. They already have a mortgage, an auto loan, and a few credit cards. When you add another few hundred dollars per month in a home equity loan payment, it can really overextend you quickly. In addition to that, many homeowners borrow the full amount of equity available to them and do not leave themselves any kind of cushion.

 

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