At some point in time, you may be faced with a huge expense. It can be an expense that you planned on having like a home renovation, or it could be an unexpected expense like medical bills after an illness. Whatever the expense may be, you will need to come up with a large sum of money. If you are a homeowner, the best way for you to gain access to a large sum of cash is to tap into your home’s equity.
A home equity loan or a home equity line of credit (HELOC) is the best way for you to get the cash you need for a huge expense. Your home’s equity most likely represents a significant portion of your net worth. It’s an asset that you can leverage to build more net worth. Home equity loans and HELOCs are most often used for home improvements, debt consolidation, investment opportunities, retirement income, and emergency expenses. There are many benefits to having a home equity loan or a HELOC you can find on the Home Equity Wiz Blog, but there are also some potential pitfalls.
Here are some of the pros of having a home equity loan:
- One-time event: You will receive the proceeds in one lump sum. You can use the money for any purpose.
- Fixed interest rate: A fixed interest rate means you will have a fixed and predictable monthly payment.
- Lower borrowing costs: Using your home as collateral and having a fixed interest rate means the cost will be lower than a credit card or personal loan.
The cons of having a home equity loan include:
- Higher interest rate: It is a second mortgage and will typically have a higher interest rate than your first mortgage.
- Collateral risk: Using your home as collateral for a loan means you will lose your home if you stop making the monthly payment. Lenders will work with you if you fall on hard times, but they will expect you to make full monthly payments.
- Fees: There are typical costs with closing, such as an application fee, an appraisal fee, other fees. These can be rolled into the loan, but it will increase your balance and monthly payment.
You can get cash from the equity in your home with a HELOC in a different way. Here are some of the pros of having a HELOC:
- It’s easy to get: If you have equity in your home and a decent credit score, you can get a HELOC.
- Only use what you need: You do not have to use all the money at once. You can draw money in increments.
- Low interest: Interest and fees are low, and you are only charged interest and fees once you use the money.
The cons of a HELOC include:
- Adjustable interest rate: Your interest rate can adjust, which may increase your monthly payments.
- Home value decreases: You could end up underwater if the value of your home decreases and you have a mortgage and have used your HELOC.
- Hidden fees: Many lenders will charge fees if you do not keep a minimum loan balance, if you do not borrow a certain amount each year, or if you terminate early.