What are the Disadvantages of a Home Equity Loan?

A home equity loan is a type of loan that enables homeowners to borrow money by using their home as collateral. The amount of the loan a borrower is eligible for is determined by the difference between your home’s market value and the remaining mortgage balance.

It can be a viable option for people to take out a home equity loan who need a substantial amount of money for a particular purpose like for home improvement projects or debt consolidation. They are a convenient, low-cost way to borrow large sums of money at favorable loan rates.

But it’s important to point out that there are also some disadvantages that homeowners need to know about when they take out a home equity loan.

 Here are just some of the major disadvantages of taking out a home equity loan.

 

Risk of Over borrowing

 As attractive as a home equity loan can seem, it can lead a homeowner to over borrow. That is because homeowners are enticed to borrow more than they actually need or can afford. This happens due to the fact that they have access to equity in their home.

This can pave the way for a cycle of debt that is hard to get out of.

 

Decreased Equity in Your Home

 As you proceed to take out a home equity loan, you are borrowing against the equity in your home. That translates into your equity being reduced, and that can have long-term consequences if you opt to sell your home in a few years.

If you have used a substantial amount of your home equity, you may have less money to allocate towards a down payment on a new home, or you might not be able to sell your home at the price you intended to.

 

Potential to Owe More Than It’s Worth

 A home equity loan takes into consideration your property value today. However, if the housing market crashes or your neighborhood becomes less desirable, the value might go down.

If the value of your home declines, you could owe more on your home than it’s worth. That will make it difficult to sell.

 

Credit & Equity Requirements

 With home equity loans, you are generally able to enjoy lower interest rates than with unsecured loans or credit cards. But the most competitive rates are awarded to borrowers who have good to excellent credit. Likewise, qualifying for a home equity loan normally requires having equity in your property. Most lenders will only allow for a combined loan to value of 80%, meaning that your 1st mortgage and equity loan cannot total more than 80% of your total value. 

 

Closing Costs

 The vast majority of home equity loans come with closing fees, and they may include an application for a loan processing fee, appraisal fee, origination or underwriting fee, lender or funding fee, title fees and recording fees, etc.

 

Shorter Repayment Terms

This is a significant disadvantage of home equity loans. They typically come with much shorter repayment terms than other types of loans. This translates into the consumer having to make higher monthly payments in order to pay off the loan in a brief amount of time.

 Paying off a home equity loan in such a short period of time can prove difficult for many homeowners, especially for those on a limited budget.

 

Limited Use of Funds

 Some home equity loans can be restrictive when it comes to how the funds are used. As opposed to a personal loan – which can be used for a wide range of purposes – home equity loans are typically only approved for specific uses, like home improvement or debt consolidation. This can be a source of frustration for some homeowners who want to use the money for other purposes such as to pay medical bills or help with their child’s college tuition.

Weigh the Risks When Deciding Whether to Take Out a Home Equity Loan

 As with any type of loan, there will be both pros and cons to the equation. While there are some disadvantages, home equity loans also present some benefits. It all depends on your unique circumstances as to whether you would profit from this type of loan.

 You should consult with a professional before deciding whether to move forward with a home equity loan.

 

Look to California Community Credit Union for Home Equity Loans

 At California Community Credit Union, we offer two programs for home equity loans. Both are fixed-rate home equity loans. You’ll never have to worry about rising interest rates with these loans.

Also at CACCU, we provide a no-fee home equity loan special if the loan amount is under $50,000. Borrowing against the equity you have in your home couldn’t be easier.

 We are here and ready to serve your needs for a home equity loan that is tailored to your personal needs.