A home equity line of credit is a financial product designed to help homeowners borrow some money using their home as collateral. It is a secured line of credit, in other words a secured loan. Traditional banks, financial institutions and even private lenders may be willing to offer you a home equity line of credit after factoring in the total value of your home, the pending mortgage, your financial profile including income and debts, credit score and other factors that are determined on a case to case basis. A home equity line of credit may just be what you need at a given time or it can be an unwise move. Here are the home equity line of credit pros and cons.
List of Pros of Home Equity Line of Credit
1. A Pragmatic Financing Option
If you are looking for a short term or even a long term loan and you don’t have many choices at your disposal, then home equity line of credit can cater to your needs. You may need some money to pay for repairs or upgrading certain fixtures in your home. You may have a medical emergency or a personal financial obligation that must be taken care of immediately. Not everyone has a ton of financial options so home equity line of credit is the help you can get.
2. Greater Loan Amount, Lesser Interest
A home equity line of credit is secured so it is relatively easier to get. The loan amounts or the credit available can be much higher than personal loans or those offered by smaller private lenders. You can use the money at one go or over a period of time and the rates of interest would be relatively lower because you are using your home as collateral.
3. Tax Deductible
The interests you pay towards your home equity line of credit may be deductible when you pay your taxes. Your credit cards or other personal loans would not have such a benefit.
List of Cons of Home Equity Line of Credit
1. Risky Proposition
A home equity line of credit may mean easy money and homeowners may not always make good use of the funds. The loan has to be repaid with interest so anyone with poor spending habits or an unstable income should try and avoid such loans unless absolutely necessary. Home equity line of credit can be frozen if the property of the value depreciates, the property may be usurped by the lender if the loan is not paid and there are many other undesirable possibilities
2. Not for Small Loan Amounts
It is not for very small loan amounts. There are upfront costs, processing fees and the entire process is not worthwhile if you just need a bit of money.
3. Spike in Interest
Most home equity line of credit propositions come with floating rates of interest. Should the rate surge northward, you could be in trouble.