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Pros and Cons of a Home Equity Loan

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With the rise in home prices many homeowners now have plenty of equity in their homes. Many homeowners are using that equity to obtain home equity loans, which have benefits and unfortunately also disadvantages.

Some of the advantages of a home equity loan are:

• If used for bill consolidation, you will most likely get a much better interest rate on a home equity loan than you have on your standard credit cards and possibly many of your loans. Interest on credit cards can run as high as 24% while many home equity loans may have interest rates as low as 6%.
• Even someone with less than desirable credit can often qualify for a home equity loan.
• Interest paid on a home equity loan, up to $100,000.00, is most often tax deductible.
• If used responsibly, a home equity loan could improve your credit rating.

Some of the disadvantages of a home equity loan are:

• Monthly payments may be lower than the total payments of your debts but with a home equity loan the payments will be spread over a much larger period of time. Try to keep the term of the loan as short as possible. You should also pay extra when possible to shorten the term of the loan.
• Many home equity loans do not have a fixed rate but have a variable interest rate. A fixed rate home equity loan will have set monthly payments but variable rate home equity loans have payments based on the current interest rate, which could rise considerably, but your income may not be rising.
• You may not be able to lease your home during the term of your loan.
• The biggest disadvantage is that you are putting your home at risk.

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