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Advantages and Disadvantages of Home Equity Loans

Advantages and Disadvantages of Home Equity Loans

In life, we are always stuck with having to shoulder a lot of extra major expenses to renovate our homes, pay for college, or take care of medical bills. Where do we get the money? With all the credit card bills, tuition, and utility bills we have to take care of, where can one get a loan big enough to cover huge expenses like these? The answer is in your home, and this is through a home equity loan. Basically like a second mortgage, you use your house as collateral so that you can take on another loan to take care of the big expenses needed to give your family the life they deserve.

With a home equity loan, the usual process when a person applies for the loan and is approved, he or she receives the lump sum of the amount of the loan. When compared to a home equity line of credit, it is different because a line of credit allows the borrower to withdraw amounts depending on the borrower’s needs.

The best part about availing of a home equity loan is that the interest rate is usually fixed for the number of years of the repayment of the loan. This means that you will be able to plan the payment of the loan better as you pay it every month. It is always better to have an expected loan interest rate rather than one that is variable and that will change with the performance of the economy and with the lending company. Also, the monthly payments are much more manageable than annual payments. Many have found that it is easier to discipline ones-self with monthly payments rather than saving up money to make one huge bulk payment.

With home equity loans, the interest rate can even go lower than what people pay on credit card bills. This is what makes the home equity loan so attractive. On the other hand, there is also a downside to getting a home equity loan. Because you put your whole home up as collateral, the whole amount that you borrow is a lot more than what you actually might need. This also means that the interest is based on the whole big amount that you borrow rather than on the amount that you actually use.

Also, using the money that does not lead to good investment in the future will not help you in your actual net worth. For instance, after you get your home equity loan you end up buying two family cars. You have to realize that a car’s value depreciates rather than go up. It might be best to invest in something that will give you something back in the long term, such as a college education for your child or on home improvements that will jack up the value of your home. By doing this, you will definitely increase your net worth.

Overall, the biggest downside to making a home equity loan is that you are in risk of losing your home if you do not make the repayment amounts as stipulated in the agreement. Always be sure to make payments on time, every time, in the appropriate amounts. Otherwise you will lose your home and end up with nothing in the end.

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