Home Equity Loan Risks
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If you’re a homeowner, you may be eligible to take out a special loan known as a home equity loan, or HEL. An HEL may allow you to borrow 80% of the value of your home minus the current balance of your mortgage.
In addition to home equity loans, banks also offer homeowners home equity lines of credit (HELOCs). Home equity lines are different from home equity loans. With HELs, you receive your money all at the same time in one lump sum. HELOCs, on the other hand, are more like credit cards because they offer borrowers a set credit line that they can dip into over time. Each month, the borrower can pay the monthly minimum or as much as they want. Home equity lines typically have variable interest rates that change on a monthly or yearly basis, while home equity loans are usually fixed.
As with anything else, there are risks that come along with an HEL or an HELOC. If you fail to make your home equity loan payments on time, you could risk losing your home and you’ll still have to pay back the remaining balance. Just like HELs, failure to keep up with HELOC payments can result in having your home repossessed. And unlike equity loans, equity line lenders can drop your credit limit to whatever you currently owe and prevent you from using any more credit.
As you can see, despite the convenience, borrowing money via a home equity loan or line of credit can be risky. If you’re considering one of these options, you should be aware of a few things.
✓ Watch Out for Variable Rates. Offers with adjustable interest rates are tempting because they can be so low during the first year of the loan. But watch out, because these variable rates are infamous for skyrocketing during the second and subsequent years. Ask your lender about the interest rates including how much you can expect them to increase over time and a worst-case scenario.
✓ Understand Tax Breaks. One of the nice things about HELs and HELOCs is that the interest you pay may be tax deductible. If you’re using the money to pay for home improvements, the interest is tax deductible up to $750,000.
✓ Look Out for Fees. Many lenders charge hundreds or even thousands of dollars in initial or ongoing fees when you borrow using a home equity loan or line of credit. In some instances, though, these fees can be waived, so keep an eye out. Always factor in fees before deciding whether it makes sense to borrow via an HELOC or HEL.
✓ Shop Around for the Best Deal. Before deciding on a home equity lender, you should know what options are available. Contact me with your questions so I can help you find the best fit for your needs.
Home Equity Loan Risks
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Marina Jacobson
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