Tapping into your home equity for a loan is a double-edged sword as it presents equally significant advantages and risks. Suppose you are serious about getting a home equity loan to improve your property. In that case,you must first be aware of its advantages and disadvantages so you can make an informed decision on whether or not you will push through with a home equity loan.
A home equity loan is like a second mortgage loan wherein you use your home equity as collateral for a cash loan. Home equity refers to the difference between the total value of your property and your mortgage balance. The higher the home equity is,the more considerable the loanable amount will be.
If you are unsure whether a home equity loan is the right choice for you,here are some of its pros and cons:
Pros
- Fixed interest rate: Since home equity loans are secured by using home equity as collateral,banks and lending companies can offer fixed interest rates,making it easier for borrowers to repay the loan. In countries like Australia,where the real estate market is constantly changing and interest rates fluctuate,a secured loan like a home equity loan in Australia is among the most practical options.
Extended repayment terms – Loans with long repayment terms and fixed interest rates guarantee lower monthly payments,making it easier to pay and providing borrowers with a lower debt-to-income ratio.
Cons
- Risk of losing your home – Since your home is used as collateral,once you default on the payments and cannot pay beyond the grace period,you can lose your home.
Liens: If you decide to sell your house,you will still be responsible for the home equity loan attached to your home,making it harder to sell and process the transfer of ownership due to additional paperwork.
Look into your options or talk to an expert to know what’s the best type of home loan for your needs.