The Perks And Drawbacks Of A Home Equity Loan

When you’re able to pay off a significant amount of mortgage and as the value of home increases over time, so does your home equity. It refers to the amount you own outright of your home or the difference between your home’s total market value and the liens attached to that property. Once you’ve accumulated enough equity, you can now tap on it and use it for different purposes.

When you think it’s time to use your equity, one way to cash it out is by applying for a Home Equity Loan. However, HELs has its pros and cons, just like any other type of loans. So, before you decide to tap on your equity, make sure to know the Texas Home Equity Loan Rules by taking note of the following perks and drawbacks.

Receive a large sum of money

After getting approved for a Home Equity Loan, you’ll either receive it in cash or the lender will credit it to your account. If you apply for a Cash Out Refinancing, you’ll receive a lump sum of money. For Home Equity Line Of Credit, the funds will go straight to your account. You can then choose when to use it by simply withdrawing a set amount each time.

Additional Costs And Fees

The additional fees and closing costs can add up to the total amount of the loan. One should consider these fees when comparing a Home Equity Loan with other options.

Flexible funds

Once you receive the funds, that you can use for home improvement projects, to consolidate a loan, to fund your child’s education or whichever purpose you might want to use it. Lenders won’t check how you use the funds after approval, but during application, it would be best to provide with a good reason to approve your loan.

Good Reason: 7 Ways To Use Your Home Equity For Retirement Income

Lower Borrowing Costs

When compared to credit card debts and personal loans, HELs typically have lower interest rates. The reason being your lender has a significant asset as collateral, which is your home.

Risk of Foreclosure

Since a Home Equity Loan requires you to use your home as collateral, you’re at risk of losing your home, which is you need to ensure you can pay it off before applying for it.

Fixed Interest Rates

HELs usually has a fixed rate. This means you have protection in case interest rates move upwards. In other words, you get to enjoy fixed monthly interest rates no matter how the market moves.

A possibility of owing more than your homes’ value

The real estate market can be unpredictable. If in case your home value drops after you tap on your equity, your mortgage could go underwater. This, unfortunately, means you owe your lender more than what your home is worth.

Tax Benefits

One can choose however they wish to use the funds. However, if you use it to improve your home, one can deduct the interests out of the project thus letting you save money.

Good Read: 10 Tax Deductions for Home Improvements

These are the common pros and cons when it comes to Home Equity Loans. Whichever Home Equity Loan type you may choose, make sure to explore your options first to try and check which one will benefit you for whatever reasons you have in acquiring your equity.