What Are The Pros And Cons Of A Home Equity Loan?

Two Great Benefits Of A Home Equity Loan (HELOC) Are Lower Interest Rates And Tax Deductions.

Due to the fact that your property is used as collateral on a home equity loan, and poses less of a risk then other types of debt that are not secured, the lender has less exposure and is going to be more inclined to offer you a good interest rate on the money borrowed.

The interest that you will be paying on the first $100,000 that you will borrow through a home equity loan is tax deductible and this is also of great benefit to you. Non-secured loans do not offer this advantage. Whatever the amount is that you pay in interest each year, that is the amount that you can deduct from your taxable income, up to $100,000. If the home equity loan is taken out for home improvements or to buy another home, you can then deduct interest paid on the first $1,000,000. Home improvement loans are similar to first mortgages for tax purposes and that is why this is permissible.

Home equity loans do not come totally risk or cost free though. The more you take out in equity the more your ownership diminishes; you own less of your home. If you are ever in default of payment, on a home equity loan, you can lose it to foreclosure by the lender. And, finally, there are costs that are similar to those that you paid when you first purchased your home. So as always, discuss all of the pros and cons with your financial advisor, educate yourself and decide if this is the situation and level of risk best suited to your situation.

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