Home Equity Loans – Advantages & Disadvantages

Home equityloans or lines of credit allows you to borrow money, using your home'sequity as collateral where equity is the difference between how much the home is worth and how muchyou owe on the mortgage. A home equity loan (or line ofcredit) is a second mortgage that lets you turn equity into cash,allowing you to spend it on home improvements, debt consolidation, collegeeducation or other expenses.

Advantagesand Disadvantages of the home equity loans

Advantages:There are many other advantages of home equity loans. The loanpayments on these loans are tax deductible. Home buyers can take bigger sumequity loans. These loans also carry a low rate of interest. But it’s best toheck the prevailing interest rates from many lenders and banks before youactually go in for a loan. It’s also important that the borrower check thecredentials of the lenders before applying for a loan. They are many scam andcon artists who can take away your home in lieu of giving you a home equityloan. The borrower also risks losing the home in case they default on the loan.

The two majoradvantages of borrowing with a home equity loan are lower interest rates andpotential tax savings:

-         The interest rate you will payon the average home equity loan is generally lower than the interest rate youwill pay on the average credit card or any other type of non-secured debt.

-         For home equity loans, you cangenerally deduct the interest you pay. The interest you pay on credit cards andother types of personal loans is generally not tax-deductible.

Disadvantages:

Risk of losing home. If you can’t repay orrefinance the loan, then you may be forced to sell or lose your home. Your homeis the collateral for the loan. Being late or missing loan payments can triggerforeclosure within 60 to 90 days.

Rising interest rates. With a variableinterest rate, most home loan rates change when the economy changes. This meansyour monthly payments can rise and fall. Be sure you know what the cap is onthe loan’s interest rate. The cap sets how high your interest rate can increaseeach year as well as how much it can increase over the whole loan time period.

Fees. Lenders can charge a variety of feesincluding origination, application, and withdrawal fees. Be sure to ask aboutall possible fees.

The majordisadvantage of a home equity loan is that you are using your house to getapproved for the loan. For some people who have flawless credit this might notbe a problem, because they can insure themselves that they will do whatever ittakes to pay off their loan. However, instances have arisen where individualshave forgotten or were they are not financially able to pay for their loans. Soat this point you’re wondering what happens if you cant pay your home equityloan? With all financial decisions come risk and the risk of losing your homewouldn’t be an option, especially if you have a family.

Home equity loans are best used for homeimprovements that will increase the value of your home. Some improvements, suchas swimming pools, don't usually increase the value upon resale. Others, suchas additional bathrooms, living space, renovated or updated kitchens, etc., generallydo increase the value of your home.The bottom line is this: if your home is worthmore than you owe on it, a home equity loan can be a great way to takeadvantage of this, but it can also get you into serious financial trouble, andshould be used wisely. Why not use the equity in your home as part of yourretirement fund instead of spending it on things that may not last?

Over the life of homeloans - sometimes up to thirty years - your financial circumstances canchange dramatically. Starting a family, changing jobs, children leaving homeand many other factors can alter your financial circumstances over the term ofthe loan. A home loan that is right for you at the beginning has the potentialto become the worse mistake you ever made.

Refinancing can be useful and financiallyrewarding but it can also carry risks. It takes time and costs money, so beforeyou decide to change to another lender, ask yourself if it is really the rightthing for you.

• Are you happy with your existing lender? Have they been professional and helpful in all the dealings you've had with them?
• Are you happy with your existing loan? Is the interest rate comparable to other lenders? Could you use some extra features offered with other products?