If you own a home and have enough equity in it, you will likely be able to borrow against its value through a home equity loan. Home equity loans allow homeowners to borrow large amounts of money at competitive interest rates.
However, they are riskier than personal loans and credit cards because the borrower will need to use their equity in the home as collateral to take the loan. Here are some more pros and cons of home equity loans.
Pros of Home Equity Loans
- Fixed interest rates: Most home equity loans have a fixed interest rate, which means your monthly payments will remain fixed throughout the loan term.
- Affordable cost of borrowing: Since there is collateral involved, interest rates for home equity loans are likely to be more competitive, in comparison to rates for other types of loans.
- No restrictions on usage: Most lenders that offer home equity loans don’t impose any restrictions on how the loan amount can be used. You can use a home equity loan to pay for home renovation costs, emergency medical expenses, debt consolidation, etc.
- Tax deduction: If you use the loan amount to build, buy, or improve your home, you will also be able to claim tax benefits for the interest you pay toward the loan.
Cons of Home Equity Loans
- Risk of foreclosure: Since your property is used as collateral, there is a risk of losing your property to foreclosure if you default on loan payments.
- Closing costs and other fees: Although home equity loans have an affordable interest rate, you’ll need to pay closing costs, which can increase the cost of the loan. In addition, you may also have to pay a prepayment charge, late fees, etc.
- Immediate repayment of the loan if you sell your home: If you sell your home, you’ll need to immediately repay the entire borrowed loan amount.
If you decide to get a home equity loan, do your research and compare the interest rates and other terms offered by a few different lenders. Also, check with local real estate agents and family and friends for their recommendations on home equity lenders.