The Pros and Cons of a Home Equity Loan


A home equity loan is a type of the second mortgage. This is a secured loan with the borrower's house as collateral. By choosing such a loan, the borrower receives a one-time large amount of money. The home equity loan amount reaches up to 85% of the house's market value.

The borrower can use the money received for their own needs, no matter what they are. For example, this loan allows borrowers to pay college tuition, pay medical bills, and buy other real estates.

Home equity loan terms usually range from 5 to 30 years. As of October 19, 2022, the average interest rate on a home equity loan is 7.29%.

Pros

A home equity loan has a fixed interest rate. The interest rate indicated at the time of the loan will not change throughout the entire term, no matter how long it may be.

Lower loan costs. The presence of collateral usually makes loans cheaper and provides lower interest rates than other types.

Fixed payments. The borrower receives the amount at a time, and the interest rates on the home equity loan are fixed. This makes payments predictable and unchanging.

No restrictions on the use of money. Money can be used as necessary for the borrower without restrictions and conditions.

Interest payments may not be taxed. If the borrower uses the money from the loan to improve their home, it can be possible to deduct interest from the taxable income.

Cons

The borrower's home is used as collateral. In case of non-payment of the loan, the borrower may be left without their own home.

Closing costs. There is a high chance that the borrower will have to pay closing costs, which are provided for in almost all loans that are related to real estate. Usually, they vary from 2% to 5% of the loan amount.

The need for a good credit score. Most often, lenders impose strict requirements on borrowers, and credit history will play a significant role in what loan conditions a borrower will receive and whether their will receive it.