Advantages & Disadvantages

A loan that is guaranteed by the equity in a home is called Home Equity Loan. Here are some advantages & disadvantages of home equity loan.

Advantages: They are as follows:

• Potential tax deduction on the interest you pay on your home equity loan. In most cases, borrowers can deduct the interest on loans up to $100,000 on their taxes.
• Home equity loans stimulate the economy because consumers re- circulate the money back into the market.  
• You may be able to borrow up to 100% of the value of your home, which means you may be able to borrow more than through other borrowing options. 
• It carries a much lower interest rate than credit cards and unsecured personal loans, making them the smarter financing choice for a variety of purchases. 
• Consolidating your bills with home equity can lower your monthly bills, helping you keep more money in your pocket each month. 
• The closing cost is typically lower than refinancing your first mortgage.
• It can provide ready access to money in emergencies. 
• If you need to make a major purchase then it is the best option for you, because it has got low interest rate, which is tax deducible & you get a big chunk of money all at once (if you go for traditional home equity loan). 
• If used wisely, the loan can brighten your overall financial status and improve your credit rating. 
  If you go for traditional home equity loan  then the rate is fixed for the life of the loan, allowing you to plan and budget without factoring potential interest rate fluctuations. 
• Home equity loans are typically used for consolidating consumer debt or covering a large expense such as a big wedding, college tuition, home renovations, medical costs, cars, boats or a vacation. 
• When you take out a home equity loan, though the rates are usually higher than a regular (also called a first) mortgage but the rate is generally much lower than the APR for credit cards and it is repaid over 15 years instead of 4 years, means your payments will be lower than your minimum credit card payments. 
• Obtaining a home equity loan takes about two weeks at the most, half as long as qualifying for the first one. 

Disadvantages: They are as follows:

• Your home is collateral for the home equity loan, so if you default on the loan, the bank will foreclose on your home. 
• Home equity loans use up the equity that you have built up in your home which means it will take longer to pay off your home.
• Using an equity loan to pay off debt may make monthly payments cheaper but could cost you more in long term. 
• Such loans can be a risky for younger homeowners who are not established in their careers and have less experience owning a home and managing money; and for older lenders who would be tapping their nest egg close to retirement. 
• You may not be able to lease your home during the term of your loan. 
• If you go for n variable-rate equity loans, the interest can go up substantially during high inflation -- but your income may stay the same. 
• High loan-to-value home equity loans may not be totally tax-deductible. 
• The value of your home can fall over time, thereby lowering your equity. 
• There are provisions that allow lenders to reduce or freeze a borrower's credit line, or call for full payment of the loan, under certain circumstances.
• The risk of such loans is not the only thing that is high. The interest rates are typically lower than most credit cards but much higher than the average for a regular home equity loan. 
  
  

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