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Financial Fitness: Know the Pros and Cons of Home Equity Loans

By Texas Gulf Bank Staff

If you need available cash to consolidate credit card debts, to pay for college or a home improvement project, or perhaps you just want to take that vacation you always dreamed about, then a home equity loan might be right for you. However, before you sign on the dotted line, take a look at some of the pros and cons of home equity loans.

The Pros
Let's look at the advantages first. The main benefit is receiving a cash settlement that can be used however you desire. There are times in everyone's life when extra money is not only appreciated but is actually necessary. Many times a home equity loan keeps a family afloat financially after an emergency. Another advantage of this type of loan is that the interest is usually tax-deductible, depending on your income bracket. Consult your tax professional on how it would affect your own situation.   An interesting feature is that you generally would receive between 70%-80% of the fair market value of your home, less any outstanding mortgage balance you may have on your house. What that means is that the equity you have in your home will be based on the appraised value of your home and how much you owe on your home--both of which will affect how much money you may borrow.

The Cons
Just as there are two sides to every coin, there are pros and cons when it comes to home equity loans. The major disadvantage of this type of loan agreement is the possibility of losing your home. Since you are literally putting your home up as collateral, if you cannot make the payments on the loan, you may lose ownership of the house and property. In spite of regulations requiring it, some lending institutions aren't sufficiently concerned with your ability to repay the loan, which is why it's vital for the homeowner to understand and agree to the monthly payment schedule. If the calculated monthly payments (plus allowances or any monthly escrows for taxes, insurance or other fees) will put a strain on your budget, try decreasing the amount of the loan until you are sure you can afford to pay it back. Also keep in mind that the length of the loan's term agreement affects the interest you will be paying. A long repayment schedule means more interest will be required, thereby increasing your overall financial obligation.

Balancing the Pros and Cons of Home Equity Loans
Although there are pros and cons of home equity loans, this type of loan is very popular and is often the solution to a homeowner's needs. To properly balance the pros and cons associated with home equity loans, consider your long- and short-term goals. If you require a ready sum of cash for a home remodeling project that will increase the long-term value of your house, then this loan could possibly benefit you. However, if you are looking to consolidate debts, a careful assessment of future spending practices should be evaluated and weighed against the monthly payments.

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