Assessing Home Equity Loan Pros and Cons

Home equity loans are being touted as the answer to financial prayers these days. Lenders far and wide – and out in cyber-world – are trying to get borrowers to get home equity loans to pay off credit cards, go on vacation, and for other expenses. Before jumping into a home equity loan, you should educate yourself about home equity loan pros and cons to determine whether this option is right for your situation.

On the “pros” side, a home equity line of credit, or second mortgage, can help consolidate bills. People who have five or more revolving credit accounts like store accounts and credit cards could simplify their financial lives by getting a home equity loan. Instead of making numerous payments every month, you can eliminate those payments and the possibility of several late fees and exorbitant interest rates by getting a home equity loan.

The payments also may be much lower as home equity lines of credit typically do not have interest rates comparable to that of credit cards especially if the borrower has generally good credit. That means that the monthly payment on a home equity loan will save the borrower money over paying the bills separately.

On the other hand, a home equity loan is a dangerous way to get money. First, there may be personal or other secured loans available that will give the borrower money at a lower interest rate, and those options should be explored before the home equity loan option is considered. Second, a home equity loan puts your house in jeopardy.

Essentially, when you get a home equity loan, you are asking a financial institution to give you XX amount of money with the understanding that the financial institution will foreclose on and take your home if you cannot pay. That means that a home equity loan should not be taken lightly. Research shows that people who get loans to pay off other debt or who use debt consolidation are in just as much of a rut within one year. Most people fall into the same problems because they don’t change their spending habits.

These people get loans or go through consolidation services and do not stop spending above their income, which is what got them into this problem to begin with. A home equity loan, then, is particularly dangerous unless you take a serious look at how you spend money and begin to cut back. Otherwise, you will run up more debt and have bills that exceed what you have now. Then if you cannot pay back the second mortgage, you will lose your home and still have debt.

Considering the home equity loan pros and cons can shed some light on whether or not this option is right for you. Remember that you are the only one who can take control of your financial future, and if you decide to go with this option, you should be prepared to make the changes that will be necessary to ensure you keep your home.