Pros & Cons of Home Equity

Great home equity loans are an affordable way to borrow large amounts of cash, but they are not for everyone. Read on to learn the pros and cons of home equity debt.

Pros

Here are some of the main advantages of great home equity loans:

Reasonable interest rates. Credit cards have average interest rates of about 16%. Depending on your credit and market conditions, this rate is about double what you could receive on a home equity loan.
Tax-deductible interest. Borrowers can deduct mortgage interest, including that of great home equity loans, of up to $100,000 on their income taxes. This considerably lowers the costs of obtaining such a loan.
Versatility. Great home equity loans can be used for virtually any purpose. Large purchases, medical expenses, and major emergencies are just a few of the things a home equity loan can cover.

Cons

Great home equity loans also have several disadvantages that borrowers must consider before applying. We've listed the most important drawbacks of these loans below:

Risk. If you default on a home equity loan, you could lose your home.
Trouble for younger borrowers. Great home equity loans are not an ideal borrowing vehicle for young homeowners because they are often not settled in their careers and have little experience with money management and homeownership.
Threat to your investment. For older homeowners, home equity loans are not a wise idea either, as they might jeopardize their nest egg too close to retirement.
Variable interest rates with some forms. The rates on great home equity loans tend to be fixed, but home equity lines of credit usually have variable interest rates. These rates could increase while your income remains stagnant.
Depreciation. If your home loses value, you might owe more on your equity debts than the home is worth, which would result in major losses if you had to sell the house.

If you have questions about home equity that have not been answered yet, see if it is frequently asked and what the corresponding answer is.