Considering all scenarios, home equity loan cannot be considered perfect every time. A home equity loan is a type of consumer debt which uses the built-up equity of a home as collateral. It allows the owners to borrow against their equity in the residence.
It is further a mortgage that provides collateral for an asset-backed security which is given by the lender and tax-deductible interest payments for the borrower.
The money from home equity loans can be used in many other ways, such as for retirement income and paying off student loans. With the benefits of an equity loan, it’s important to know the consequences of misusing it as well:
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Pros of Home Equity Loan
- Lower interest rates
In comparison to other standard loans, home equity loan interest rates tend to be lower because they are secured loans. The bank has a solid trust that the borrowers can repay the loan and will not put his/her home at risk.
- Tax benefits
The tax added to the home equity load are generally tax deductible similar to the primary mortgage. But there are many limitations on the deductible amount if the fund id for another purpose except than buying, building or improving a house.
- No restrictions
The home equity loan has no restrictions on how you use the money. The home equity loan can be spent on however you wish while other of loans requires justification on how you are spending that amount.
- Predictable payments
Unlike other personal loans, the personal rate of the home equity loan always remains the same. The borrowers can expect a reliable repayment schedule for the duration of the loan.
Cons of Home Equity Loan
- You can lose your home
One must be careful on how his or her home equity loan is used. If is misuse them there may be long-lasting consequences. If there is delay in the repayment by the borrower then the bank is well within its right to take ownership of the home, and sell it to cover the remaining debt. This process is known as foreclosure and the borrower can lose his home in this process with nothing left behind.
- Extra cost
In most of the financial institutions the process of taking out a home equity loan will charge fees for their services they provide to you. These services include application processing and house appraisal, and also the closing and origination fees, which is total of three and six percent of the loan amount.
- Increase in debt
Depending on the amount of money taken, it may take much amount of time to build up enough new equity to make a home equity loan possible. It is quite necessary to consider that by turning equity back into a loan, the borrower can return back to the debt he had gotten out of.