Advantages & Disadvantages of Home Equity Loans

[imranmortgage]

Advantages

1) Home equity loans are easier to get because of their secured nature and are particularly good for those with a tarnished credit rating or history.

2) Home equity loans offer far lower rates of interest than unsecured loans and credit cards, and this is because they are secured loans and therefore less of a risk to the lender. This contributes towards lower monthly repayment as well as less interest to pay overall on the total loan.

3) Home equity loans enable you to unlock the cash that is tied up in your property without having to actually sell your property.

4} Extended Repayment Schedules – You can often choose to hold onto a home equity loan for as long as you own your home. These extended repayment schedules make the month to month management much easier.


Disadvantages

1} The biggest drawback of a home equity loan is the fact that your home is on the line and you could lose your home if you default on your payments.

2} When you borrow from your home's equity you also reduce the equity or ownership you have in your home. This means that you trade ownership or equity in your home for cash that you will use for some other purpose.

3) In addition to interest you will pay on the loan, there are also costs associated with taking out a home equity loan - these costs are similar to the costs you paid when you bought your home.

[boefixepa]

The biggest risk in my opinion is self control. Many people take out a HELOC (home equity line of credit) to pay off alot of CC or get a load of cash to do something. Like remodel their house or such. The problem lies in this....it's a bandaid. If you don't solve the problem first....ie learn to control your spending and live within your means...then you are creating more of a problem. In the end you will simply be back in debt AND have a HELOC payment too!!

Case in point is a friend of mine and her husband. They took out a 125% HELOC!! and paid off all of their CC and cars. They felt the momentary reflief of having lower monthly payments. What did hubby do....he went out and got a truck!?! Because they 'could afford' the car payment now. Needless to say in less than a year they were in real trouble. They had charged up their cards again, had a new car payment, AND now had the HELOC on top of that!!

Now, if you can stop....find and solve the problem of overspending...set up a budget and really stick to it....then yes a HELOC is a real help. I watched my friend and then was really aprehensive to do the HELOC. I first spent over a year learning how to live in a budget, then did the HELOC, and am still doing very well in paying it off quickly. It is my target and I watch the principle go down each month. For me it has worked very well, but I approached it very carefully.

Bottom line, like most things in life, it depends on the situation and the people. A HELOC can give you a false sense of security, but what it boils down to is that it is still debt and you still have to pay it off. The debt is just transferred it has not gone away. If you don't have the goal of really working to pay it off and understand that it really doesn't 'give' you more money, then you should NOT consider it as an option.

My two cents.

[Haku]

I agree. Like many things out there in the financial world, HELOCs are a double-edge sword. The important thing is to make sure you using it to help you slay the debt dragon, not butterfinger it and end up cutting yourself short.