A home equity loan is very appealing to people who own their own homes because it can help them get more cash right away, pay for home repairs or renovations, and give them a longer line of credit. A fixed-rate equity loan can lower your monthly payments, and an extended line of credit can help you pay off high-interest credit card debt or other personal debt. Still, home equity loans come with some risks.
Some lenders and brokers can promise a lower interest rate or lower monthly payment, but if the borrower's credit score goes down, the payment could go up. If a homeowner can't meet the new requirements, their house could be taken away if they can't pay their debt on time. This is not a good way to consolidate debts or refinance a home if the borrower ends up with a bigger loan that is hard to pay off.
Even if a borrower saves money on the home equity loan or line of credit itself, they may spend too much on other things. If they pay off their credit cards, they might start using them again to buy things and end up making monthly payments that are too much for them to afford. Also, what happens when the estimated amount of money needed for a project (like fixing a house, paying for college, or dealing with a medical emergency) ends up being more than the initial amount of money? People who borrow money may end up spending more than they wanted to save.
Some mortgage companies might charge high fees that the homeowners don't know about until they sign the final papers. This is happening more and more, and it's important to know all the terms and final costs before you sign anything. Other bad things that lenders do are equity stripping, loan flipping, and borrowing too much. Equity stripping is when a lender lies about an applicant's income to get the loan. This makes it impossible for the person to pay back the money. Loan flipping is when a lender raises the amount of the loan by making the current mortgage bigger. This means that the borrower has borrowed more than he or she can pay back. When you overborrow, you take out a loan for more than what the house is worth. This borrower can't get a tax break on this amount, and he or she may not be able to make the payments on time.
There are many good things about a home equity loan, but there are also some things to watch out for. No matter how big or small a payment is, it's important to use good budgeting and money management to stay on top of it.
