With the refinance craze that has swept the country for the past few years many people have gotten caught up in the hype surrounding these types of loans. But before anyone decides on getting a home equity loan it is a good idea to look at the pros and cons of doing so. Getting a home equity loan is a serious financial decision and as such needs to be thoroughly researched so that you, the borrower, know the ramifications. Probably the first thing that you need to be aware of is that a home equity loan is, in essence, a second mortgage on your home, and as such carries all the terms and conditions of a first mortgage.
On the pro side, there is a definite upside to getting a home equity loan. The obvious thing is that you will get a large infusion of cash that you can use for just about anything you want. Once you have signed the papers you will probably receive your check after the closing of the loan is completed. Once the check is in your hand you can use that extra cash for remodeling your house, buying a new car, paying off credit card debts or even invest it and try to make more money. You will also be able to deduct the first one-hundred-thousand dollars of interest on your income tax returns, which can be a large tax savings for you.
You will also have to weigh the disadvantages of getting a home equity loan as well. You must be certain that you can make those monthly payments, in addition to the payments on your first mortgage. Having two house payments a month can be a strain on many people’s finances, particularly if you or your spouse were to lose your job. You also need to make sure that the market for housing in your area is stable. A sudden housing market drop and even selling your home may not produce enough cash to pay off both of your mortgages.
Many people use a home equity loan to pay off other debts, hoping that consolidating many payments into one will make their financial situation better. While this may look good in the short term you need to weigh the benefits against the long-term interest you would pay on a home equity loan. Sometimes it may make better financial sense to simply pay off your other debts without the added risk of using your home as collateral.
The pros and cons of a home equity loan are many and it is important that you look at both sides of the equation carefully. Don’t be blinded by a large amount of money and what you could do with it. Realize that you are putting your home up as collateral and if for some reason your financial situation takes a turn for the worse your home could be taken away from you. Weigh the pros and cons of a home equity loan carefully before you make your final decision