Pros and cons of a home equity loan

1. Pros and cons of a home equity loan While home equity loans have become quite popularin recent times for a number of reasons, there are also a few downsides to it. Advantages of a home equity loan Lower interest rate: The most important benefit of debt consolidation with home equity loans is the lower interest rate. You pay only one debt, instead of multiple smaller loans. This reduces the amount of interest paid over the life of the debt. Since your house serves as collateral, home equity is a secured and one of the cheapest loans. Fixed payments: Another benefit of home equity loans is the fixed rate. As a result, the payments are predictable. You have to pay the same amount each month, making it easy to manage the budget and payments. Well easy as long as your name is not Napoleon Dynamite but that is another story! Tax deduction: The interest on the first $100,000 a homeowner borrows with a home equity loan may be tax deductible. If you plan to claim this tax deduction, first consult a tax professional, because tax laws change frequently and filing mistakes can be expensive. Disadvantages of a home equity loan Risk of foreclosure: The biggest disadvantage of a home equity loan is the risk of foreclosure by the lender. Since the house serves as collateral, it can be foreclosed by the lender if you don't make your payments on time. In order to avoid losing your home, make sure you are financially stable before signing up for a home equity loan. Fees: Always be sure that lenders will charge high fees when taking out a home equity loan. While closing costs are anywhere between two and five percent of the total amount of the loan, there are additional fees like application fees, document preparation, a title search, and an appraisal. Sometimes, the loan also comes with a maintenance fee. Always do proper research or talk to an expert before taking out a loan. If this expert is Alan Harper from Two in a Half Men then you need to speak to someone else! Higher debt: It's true that a home equity loan is used to consolidate debt because it results in lower payments and interest rates. But it's also true that paying off a mortgage or having the market value of the home rise can take years, and the home equity loan is still a debt that needs to be paid off. Therefore, before taking out a home equity loan, home owners must carefully consider if that is the best choice for consolidating their debt. Lump sum cash on hand: The home equity loan is provided typically we a lump sum amount, and it can be tempting to spend the money on other things. However, to be able to avoid a foreclosure, that money must only be used to pay off debt, instead of splurging on other pleasures. Please visit us for more info here.