What is a home equity loan?

 

A home equity loan is a kind of mortgage loan wherein the borrower utilizes the equity of his/her home as collateral. The amount of the loan depends on the price of the house. An appraiser from a lending institution shall be the one to determine the value of the property.

 

The main disadvantages of a home equity loan:

 

Interest Rates

 

Home equity loans generally have fixed interest rates, but they often come with variable interest rates. If you want to pay back your loan immediately, you should thoroughly review your interest rate.

 

At first, the adjustable-rate-mortgage (ARM) interest rate may seem manageable, but it can exponentially grow over time. The accumulated amount of interest rate will make your monthly payments extra hard to pay.

 

It is of maximum importance to research and compare the terms and conditions of different lenders. Moreover, it would be best if you become aware of the varying interest rates of their loans. On top of that, also calculate the interest rate of the home equity loan— before you even borrow. Failure to do so can cost you your home-sweet-home. So beware!

 

Amount of loans heavily subjected to the housing market

 

Credit cards and home-equity loans are similar to each other in the sense that both are a lump sum that needs to be paid at once. Also, both have maximum limits laid down by law. The limit threshold of home equity loan usually is around 70 to 85% of your home value—based on the sort of home equity loan you are applying for. Essentially, this makes you unable to borrow as much when a case of a decline in the housing market happen.

 

Suppose that you urgently needed money, so you decided to apply for a home equity loan. If a recession in the housing market is occurring, the value of your home will decrease. Thus, it will force you to settle down for a lesser amount than what you initially intended.

 

Tax

 

While home equity loans or credit lines can make it possible for you to make a tax cut, your loan payment may not be deductible to the extent that you want.

 

The federal tax deduction only subtracts the interest of a home equity loan depends on the percentage of an interest that you are paying on a home equity loan, instead of the total sum.

 

Furthermore, the maximum deduction can be quickly paid by homeowners in a high tax category, which means that the interest of home equity loan is not affected by the amount of tax that they shall pay.