If you are in need of some extra cash, perhaps for home renovations or to purchase new appliances, you have a few options. You could take out a personal loan or put the purchases on a credit card, but there is another more common choice: taking out a home equity loan. This approach is not for everyone, so you'll want to consider the following pros and cons before taking the plunge.
Pro: You'll get a good interest rate.
The higher the interest rate, the more you end up paying for your money in the long run. Personal loans and credit cards usually have a higher interest rate than home equity loans. Especially when the housing market is doing well and mortgage rates are low, a home equity loan is usually your lowest-interest option. This is because, to a lender, a home equity loan is a secured loan. Your home is collateral on the loan; the lender can technically foreclose on you home if you do not pay back the loan. There is less risk to the lender, and they pass this reduced risk on to you in the form of a lower interest rate.
Pro: Home equity loans are easy to get.
If you don't have amazing credit or a high income, you may have a harder time getting approved for a personal loan. Home equity loans, on the other hand, are easier to apply for. The bank is more likely to approve you with a lower income or less-than-perfect credit because, as discussed above, the loan is backed by your home as collateral.
Pro: Home equity loans are simple to pay back.
Especially if you take out the loan from the same bank that holds your mortgage, it's easy to make payments on your home equity loan. Typically, the amount that you owe will just be tacked on to your mortgage payment each month. For instance, if you currently pay $600 a month for your mortgage, and you take out a $10,000 home equity loan, you may then end up owing $650 a month. You can write one check to a single lender instead of having to pay on a separate loan.
Con: You'll lose equity in your home.
With a home equity loan, you are borrowing the money you have already paid into your mortgage. For example, if your home is worth $200,000 and you only have $100,000 left on your mortgage, you have a home equity of $100,000. If you borrow $20,000 in a home equity loan, you then only have $80,000 in equity. Less equity will mean you don't receive as much money if you decide to sell the house.
Con: You will have to pay closing costs.
Home equity loans are essentially mortgages. As such, you have to go through the mortgage closing process when you take one out. This is not a huge deal for many borrowers, but since closing costs add up quickly, it may not be worth taking out a home equity loan if you only need to borrow a small amount of cash.
Con: The terms are usually long with a home equity loan.
You can find home equity loans with shorter 5 or 10-year terms, but most home equity loans are either 15-year or 30-year loans -- like a mortgage. If you do not like the idea of being in debt, this may seem like a long time to be paying back a loan. You could, of course, always pay back the loan in advance.
So, is a home equity loan a good choice for you? Chances are, if you need to borrow a large amount of cash, this is the easiest and most cost effective way to do it.
How many times have you put off making repairs around your home because you didn't have the money to make them immediately? Have those decisions caused even more repair bills because you waited to make the repairs? I have done this several times in the past, and, oftentimes, not making those repairs have cost me far more to complete because the damage spread. The whole reason I created my blog was to help others find the financing they need to make home repairs without worrying about choosing the wrong type of financing option. Hopefully, my hard-learned lessons will help you avoid the same struggles that I have undergone.