Home Equity Loan Pros and Cons: How To Decide If A Home Equity Loan Is Right For You
A home equity loan can be a powerful tool for making home improvements and other large expenditures; however, there are pros and cons of getting a home equity loan.
One of the advantages of getting a home equity loan is that home equity loans are available in large amounts, often up to $250,000. Home equity loan benefits include a fixed interest rate that is typically lower than other types of loans, including personal loans.
Among the cons, lenders charge interest on the full loan amount whether you use the loan or not, so taking out a large home equity loan can result in high monthly payments that many people aren’t prepared for.
If you need money for a home renovation or to purchase a second home or investment property, a home equity loan can help!
In this article, we’ll discuss everything there is to know about home equity loans so you can decide if they’re right for you.
Credit Union of Southern California (CU SoCal) provides mortgage refinancing Home Equity Lines of Credit (HELOCs) and Home Equity Loans.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our mortgage options, home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all of your banking needs.
What are the home equity loan advantages and disadvantages? Read on to learn more about home equity loan pros and cons.
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What Is A Home Equity Loan?
A home equity loan is a type of loan that lets you borrow money from a lender — such as a credit union, mortgage company, or bank — against the equity in your home. This is called a “secured” loan because the loan is secured by the equity (value) of your home. Failure to repay the loan could result in foreclosure by the lender.
The amount of the loan a borrower is eligible for is determined by the difference between the home’s market value and the remaining mortgage balance.
If you qualify for a home equity loan, you can use it for any significant expenses such as home renovation, emergency medical bills, or to pay off debt.
As a comprehensive financial service provider, the Credit Union of Southern California (CU SoCal) offers easy home equity loan plans so a shortage of capital doesn’t stand in the way of your financial needs.
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What Is A Home Equity Loan?
Home Equity Loan Eligibility Requirements
Here are some general requirements that most lenders will look for when evaluating a borrower’s loan application:
- Equity In The Home. Equity of at least 15% to 20%.
- Good Credit Score. Typically lenders look for a score in the mid-600 range.
- Low Debt-To-Income Ratio (DTI). Most lenders require a DTI ratio of 43% to 50%.
- Sufficient Income. Lenders will ask to see your W2s or 1099s and use these to evaluate your ability to repay the loan.
- Reliable Payment History. Have you paid your current mortgage on-time or do you have missed or late payments? Lenders want to know you’re a reliable borrower before they approve the loan.
Advantages of Home Equity Loans
Fixed Interest Rate. Unlike a home equity line of credit (HELOC), a home equity loan has a fixed interest rate for the duration of the loan. This makes monthly budgeting easier because payments are predictable.
Flexible Spending. Use the money any way you want!
Lump Sum. If you need a lot of money all at once to make a large purchase or to do a home renovation or remodel project, a lump sum is very convenient to have.
Long Repayment Terms. These loans have terms that range from five to thirty years.
Better Than Refinancing. Getting cash through a mortgage refinance requires that homeowners get a new mortgage at a new interest rate. If you have a low interest rate that is lower than the current interest rates, you’ll save more by keeping your current rate. Closing costs can be high, which makes getting cash more costly as well.
Lower Borrowing Costs. Home equity loan interest rates tend to be lower than HELOC rates.
Interest Payments May Be Tax Deductible. According to the
IRS, interest paid on home equity loans and lines of credit is deductible when you use the proceeds to buy, build, or substantially improve your home that secures the loan.
Usually Easy To Get. Borrowers with a good credit score, the right amount of home equity and the ability to repay the loan are good candidates for a home equity loan and can often get approved quickly.
Home Equity Loan Disadvantages
While there are many home equity loan benefits, there are also disadvantages to be aware of. These include:
Higher Interest Rate Than a HELOC: Home equity loans tend to have a higher interest rate than home equity lines of credit, so you may pay more interest over the life of the loan.
Your Home Will Be Used As Collateral: Failure to make on-time monthly payments will hurt your credit score. If you default on the loan, the lender can take possession of the home through a foreclosure.
Closing Costs: Most home equity loans have closing fees, which may include an application for loan processing fee, appraisal fee, origination or underwriting fee, lender or funding fee and recording fees, to name a few.
Two Mortgage Payments: Whether or not you use the money given to you in a home equity loan, the lender will expect you to pay monthly interest on the total loan amount. If you have used any part of the loan, your monthly payment will include interest and principal.
Is Getting A Home Equity Loan Worth It?
One of the advantages of getting a home equity loan is access to a large sum of cash. Another advantage is a fixed interest rate, which means predictable payments.
Although popular, HELOCs come with a variable rate that makes monthly payment amounts less predictable. Additional home equity loan benefits include a relatively easy and quick application process. Plus, if you utilize the funds for home improvements, you can deduct the interest from your taxable income and lower your tax expenses.
As you weigh the home equity loan pros and cons, consider this disadvantage of a home equity loan: borrowers are required to start paying interest on the full loan amount right away, even if the loan is not being used. Some lenders will charge an “inactivity fee” for loan accounts that aren’t actively used. If you need smaller amounts of money, consider applying for a home equity line of credit (HELOC).
Read-on for more details on HELOCs.
Home Equity Loan Alternatives
If a home equity loan isn’t right for you, consider these other alternatives for getting the cash you need:
Home Equity Line Of Credit (HELOC)
A HELOC is a revolving
line of credit, and operates similar to a credit card. As you repay the money spent the account is replenished. This allows borrowers to withdraw any amount up to the credit limit designated by the lender. You’ll pay interest only on the amount you borrow, not on the full credit line. Interest is paid at a variable rate during a draw period of typically 10 years. When the draw period ends the interest rate may adjust to a fixed rate and monthly payments will include both principal and interest on the outstanding balance.
Cash-Out Refinance
A cash-out refinance is when a homeowner refinances their mortgage to a new mortgage (typically at a lower interest), and in the process, borrows more money than what is needed to pay off the current mortgage. The first mortgage is paid off and the homeowner gets a lump-sum payout of the extra cash amount at closing. Homeowners who want to take advantage of a new low interest rate and get a large sum of cash for home improvements and other expenses are most likely to see the benefits of a cash-out refinance.
CU SoCal Home Equity Loans and Lines Of Credit
A home equity loan or line of credit from CU SoCal is one of the best ways to make the value of your home work for you. Advantages of CU SoCal home equity loans include: some of the lowest rates for both home loans and home lines of credit (HELOC), in addition to no appraisal fees, no closing costs, and generous limits up to $250,000.
A CU SoCal HELOC or home equity loan allows you to leverage the equity in your home to help you achieve your financial goals. Whether you’re looking to start that big renovation, make emergency repairs, or simply need additional cash-on-hand, we’re here to help make it happen.
- No points.
- No appraisal fees for single unit loans.
- No annual fee.
- No closing costs.
- A generous limit up to $250,000.
- Possible tax deductions on interest payments.
Why Savvy Consumers Choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.
APPLY FOR A HOME EQUITY LOAN TODAY!
Get Started on Your Home Equity Line of Credit (HELOC)