Pros And Cons Of Home Equity Loans And HELOCs

A home equity loan is a loan based on the equity of your home. In a home equity loan, the lender shares a security interest in your home. If the loan is not repaid with interest, the lender can claim your home. Equity is the value of your home, minus any mortgages and liens.

The loan is available in two formats. The Home Equity Line of Credit or HELOC is offered like a credit card and permits you to draw money against the equity in an emergency. HELOC is available at lower interest rates. The other format of homeowner loans is the Home Equity Loan or HELOC. The interest rate of the loan is fixed with a set repayment schedule. The repayment term of a HELOC is usually limited to 20 years.

HELOC provides an easy access to money, without unnecessary formalities. These loans are made available at a favorable interest rate. Taking into consideration an applicant’s credit history and the prevailing interest rate, the applicant is offered home equity at a reasonable rate. Relatively inexpensive to obtain, a home equity loan can be used for any purpose, such as home improvement, college tuition, debt consolidation or buying a new car and even funding a vacation. However, HELOC is a second mortgage. The rate of a HELOC is higher than a fixed-rate first mortgage. This makes the loan riskier for lenders to recoup their investment. The higher rate of interest leads to the creation of a higher monthly payment.

On the other hand, a HELOC provides the applicant with more repayment flexibility and provides the appropriate amount when needed. The HELOC best serves short-term finance needs. It is the best assurance to availability of cash and can be covered within a few months after it has been incurred.

There are a number of disadvantages with HELOC. The rates of interest fluctuate with time. Private banks providing HELOC sometimes exploit the borrowers, regardless of age or gender. These lenders are even known to use abusive and exploitative strategies to recover their loans. Thus, it is necessary for loan-applicants to conduct thorough research before borrowing.