The Pros and Cons of Home Equity Loans

If you are buried under a mountain of equity debt, a home equity loan can offer you relief. Home equity loans are offered by mortgage lenders as a way for borrowers to draw money from the value of their home. If your home is worth more than what you owe, you can borrow the money that you need to pay down your debt. You should be aware, though, that home equity loans aren’t the answer for everyone. Here are some pros and cons of home equity loans as a means of debt relief:

1. Freedom from Debt

The obvious benefit of a home equity loan is your ability to use the money to free yourself from debt. If you’ve built up a large amount of debt, the money from a home equity loan can help you pay off your debts all at once. Paying off your debt in one large chunk instead of small, monthly payments can save you thousands of dollars in interest. Not only will you save money on interest charges, but the money that you were using to make those small payments can now be put into a savings, retirement or investment account.

2. Lower Monthly Payments

Making one loan payment each month is often less expensive than making several credit card payments. For this to be true, your loan payment should be less that the total amount of payments you are making toward your debt. For instance, if you are paying $500 a month to your credit cards, it makes better sense to pay off your cards and make a $300 loan payment each month. On the other hand, if you are making $500 a month in credit card payments and your loan payment is greater, a home equity loan won’t save you money.

3. No Change in Habits

Part of the reason that you’re in debt may be due to poor spending habits. Paying off your debt with a home equity loan won’t change these habits and can make things worse. If you take out a home equity loan, you’ll have a monthly payment that must be made. If you continue to use your credit cards, you will have a monthly loan payment in addition to minimum payments on your credit cards. If you take out a home equity loan to pay off your debts, you must change your spending habits if you hope to stay out of debt.

4. Risk of Foreclosure

Unlike a personal loan, a home equity loan puts you at real risk for losing your home to foreclosure. In the event of loan payments default, your lender has the right to begin foreclosure proceedings on your home. Because of this, it is important that you don’t take more money than you can reasonably pay back. If you feel that you may have trouble making your monthly payments, look for ways to pay off your debt that don’t include a home equity loan.

Home equity loans can be a wonderful source of funding for people who have found themselves buried in debt. Before you take out this type of loan, you must understand the advantages and disadvantages. When you take out a home equity loan, you must commit yourself to changing your spending habits if you hope to remain debt-free in the future.

About the author:

The article has been written by Holly Nichol. She regularly writes on home equity loans.