Four Downsides Of A Home Equity Loan Worth Considering

[May 26, 2009.]

 

Oftentimes, we've discussed the benefits and advantages of borrowing a home equity loan or home equity line of credit. But, like any other type of mortgage, home equity loans also have there share of possible downsides. Below is a short list of home equity loan disadvantages every homeowner should first consider.

1. Home Equity Lines of Credit and Variable Interest Rates
Home equity lines of credit have become quite popular due to their flexibility and ease of accessibility to a large credit line. But homeowners should plan accordingly and expect to deal with possible interest rate adjustments as a result of this flexibility. HELOCs are generally fixed for a short introductory period, and soon become adjustable rate mortgages tied to the Prime rate. Regular home equity loans, on the other hand, are more traditional second mortgages and can carry fixed interest rates--though they lack the flexibility of HELOCs

2. Home Equity Loans Decrease Your Home's Equity
While this disadvantage comes as no surprise, it should be carefully considered given the current housing market and economy. First of all, homeowners with decreased home equity will find it more difficult to sell or refinance their home in the future. Homeowners who borrow more aggressively may find themselves in even deeper trouble, especially as individuals with negative equity face the more serious threat of foreclosure. Additionally, older individuals need to consider that their remaining home equity may soon become a significant source of retirement funds. As job security grows unsteady and underperforming stocks threaten other retirement funds, your home's equity is a safety cushion worth preserving for uncertain times.

3. Easy Access To Your Equity Could Leave You With Big Debts, and No Equity
With today's home equity loans, accessing your home's equity is as easy as filling out a check or swiping an ATM card. Unfortunately, this easy access to a large credit line could entice you to borrow more than originally planned. Those who use a home equity loan to consolidate credit card debts or car loans may feel relieved, and be quite tempted to rack up the debt once again. As the saying goes, "out of sight, out mind"--unfortunately, home equity loans can sometimes do the exact opposite to certain individuals.

4. Home Equity Loans Could Extend Your Debts
As mentioned, home equity loans are often used to consolidate debts as they carry significantly lower interest rates compared to most other loans. Unfortunately, most home equity loans are also amortized over a period of 10 to 15 years. So while you might enjoy lower monthly payments or lower interest rates, keep in mind that you could also be extending the time you are in debt by ten years or more. If homeowners can stay financially diligent and pay beyond the minimum requirements, then the advantages of a home equity loan's lower interest rate will really begin to shine.

Despite these possible downsides, there are still considerable advantages to home equity loans such as lower interest rates, tax advantages, and being the source for home improvements and expensive medical bills. To find out more about home equity loans and ease your decision, use our site's resource to locate a home equity loan specialist in your area today.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.