The pros and cons of home equity loans

A home equity loan can help you consolidate your debt; pay for your children's college education, or go on a family vacation. The extra cash you can get out of a home equity loan can be used for practically anything. A home equity loan is similar to a second mortgage. It is a secured loan that is based off the equity in your home. Your home is the collateral that is used to secure the loan, which means you could lose your home if you default on the loan.

Depending upon the type of home equity loan you select, you will have different terms. There is a traditional home equity loan and a home equity line of credit (HELOC). When you obtain a home equity loan, you will be given a set amount of money and you agree to pay monthly installments plus interest until this money has been paid back. When you agree to a home equity line of credit, you will be approved for a specific amount and you can borrow as much money as you need during this time. You will then need to pay back the money, plus interest by a specified date. Some home equity lines of credit are structured so you don't have to pay anything back, just the interest amount and an annual fee.

There are pros and cons to home equity loans, here are a few:

The biggest pro to a home equity loan is that you can use it for anything you need. You also do not need to have a high credit rating to obtain the loan, only a home with some equity. A home equity loan also provides a lower interest rate from personal loans or unsecured credit cards. The interest you pay on a home equity loan is tax deductible; however it is based off a percentage of your income tax bracket. The higher the tax bracket, the lower amount of money you can deduct from your interest payments.

The biggest con to a home equity loan is that you could lose your home if you default on the loan. It is similar to having a second mortgage on your home, so you need to be conscious about paying on time and in full each month or else you are putting your home at risk of foreclosure. Another worry with a home equity loan is your current job situation. Are you in a stable job that can support the monthly payment amount? If you are planning on changing careers in a few months, you probably want to wait on the home equity loan until you have secured a job with a steady income. Another con to a home equity loan is that you may end up being upside down in your loan if your home's equity drops. Always pay attention to the housing market before you apply for a home equity loan. Being upside down in a loan is bad news for you if you try to sell your home.

A home equity line of credit is a great way to help you get some quick cash and it works a little differently from a traditional home equity loan. It is similar to a credit card because you can set up a revolving account with your lender. You can decide to borrow $5,000 now and decide to pull out another $5,000 in a year or two. The equity in your home serves as collateral and the more money you put toward paying off your mortgage will increase your home's equity. A home equity line of credit can be a life-saver for someone that was recently laid-off because they can have a low monthly amount to pay to the loan and use the money to pay for their bills and expenses. You can then repay all the money when you obtain another job. It is like a credit card bill because you will have a minimum amount due each month plus the interest. The nice thing about a home equity line of credit is that the interest rate is a lot smaller from other loans so you aren't paying nearly as much money to interest.

You can borrow up to 50-75 percent of your home's equity with a home equity line of credit. Once you have a set amount, you cannot borrow above that limit. This is why it is important to decide how much money you need and how much you can afford to pay back. Never pull out too much money because you have easy access to it because the market could turn and you could be upside down in your mortgage and run into some severe financial problems.

A con to a home equity line of credit is the cost to open the account. You will need to pay an upfront fee plus the interest costs. There will be some application charges, home appraisal fees, a title fee, and some legal costs. Depending upon the lender you select, you will also need to pay transaction fees each time you borrow more money. There are some annual fees you will be responsible for and inactivity fees if you do not use your account. Finally, you will need to pay closing costs on the home equity line of credit.

Before you go out and obtain a home equity loan, take a look at your short-term and long-term goals. Determine how long you plan to live in that house and if you will maintain a steady salary to support it. While a home equity loan can be used as a quick cash method, you need to find out if you can obtain some long-term benefits from it. Try to use some of the money to improve your home. Major home renovations, like a new kitchen or bathroom, can increase the value of your home, making it much easier to sell in the future.

A home equity loan is an ideal solution if you are in a bind and you need some quick cash. Say your car breaks down and you don't have enough to cover the repairs, a home equity loan can not only give you enough money to pay for the repairs but it can allow you to purchase a new car. Home equity loans are the perfect solution to pay for the unexpected needs.

Here is a breakdown of the pros and cons to help you make your decision:
Pros of a home equity loan:

• Immediate cash to use for anything you need
• Easy to obtain, even for individuals with poor credit
• If you obtain the HELOC, you can spend as frequently as you want up to your credit limit
• You only pay money on the interest
• The interest could be tax deductible
• Lower interest

Cons of a home equity loan:

• All the fees you need to pay just to open the account
• The money will be due in full if you sell your home
• You could end upside down in your mortgage if the market drops
• You can lose your home if you default

When you are looking for a good home equity loan, search for lenders that put some of your payment toward the principal. While it may get you a lower monthly payment to only pay on the interest, your best option is to pay down the principal so you are paying down your debt.

It may seem like a great idea to borrow more money than you need, but it will come back to bite you. The money you borrow will eventually need to be paid back so you should only borrow what you need to cover your quick cash needs. Always try to pay back the money as soon as possible since it will be collecting interest. It is important to remember that a home equity loan is a loan, which means you are taking on more debt. If you are already in a bad situation, the home equity loan can bail you out, but you are merely transferring your debt to a new account. Take advantage of the home equity loan by paying as much money as you can toward the principal. For some people, a home equity loan actually makes their debt problems worse. Instead of taking advantage of the lower interest rate and paying off their debt sooner, they use it as another way to feed their addiction for more money. Set up automatic payments to help you pay on time and to pay a specified amount. This can help you avoid losing your home to foreclosure because you won't get behind on your payments.

Always take into account how much money you will be paying in interest. If you are comfortable with that number over the life of the loan, then contact your lender about a home equity loan. A lender may even be able to help you make your decision because they have financial calculators that can show you exactly how long you will be in debt and exactly how much money you will pay toward interest.