Home Equity Loans: Pros and Cons
By Daily Dosh | December 7, 2007
For many people looking for a loan, obtaining a home equity loan is the option to go for. However there are few things you should be aware of before committing yourself to any decision.
Before explaining the pros and cons, let’s look at what a home equity loan actually is. Basically it is a way to obtain credit by using your home as security. If for instance your home is worth $150,000 but you old have a mortgage of $50,000, it means you have $100,000 worth of equity which you can borrow against.
A number of homeowners will take out a HELOC (Home Equity Line of Credit), so that they can use the money for the purpose of financing home improvements. However because of tax implications amongst other reasons, the HELOC evolved to be used for other reasons.
When you pay interest on most types of debt it is not tax deductible. However it is if the interest is paid on a home load. Therefore, interest paid on a HELOC can actually be a form of less expensive debt.
Lets say you have a 12% HELOC for up to $10,000. With the majority of HELOCs you don’t actually borrow the entire amount at once. You take it out in stages, much like using a credit card of check – you just use it as required.
The benefits of this type of loan are numerous. You can simply borrow the amount you need, so keeping interest repayments down. Plus you get to reduce your taxes by a percentage of the interest paid per year.
If you had a credit card that charged 12% APR, the advantage is clear. You pay a net lower amount of money to the lender as a result of using a HELOC as apposed to a credit card to finance your spending.
As many advantages this sort of loan may have, remember just that; it is still debt. The problem is that many people find it difficult to refrain from a spending spree. As a result, a home equity loan may actually make your more fundamental problem worse, rather than better.
If you are truly dedicated to controlling your debt and want to find ways in which to reduce expenses, a home equity loan can be a good idea.
What you need to do is calculate how much you will be spending each month until for the life of the debt. Look out for debt calculators to help you.
If you are having debt problems you will need to decide if you want to spend more money over the life of the debt instead of having a smaller monthly payment, but higher total amount of interest. The better calculators will help you run through both scenarios, changing amounts to help you weigh the pros and cons.