Home Equity Loans & HELOCS: Pros, Cons and Common Mistakes
If you're like many homeowners, you have a decent amount of equity in your home. In fact, U.S. homeowners today have more equity in their homes than ever before! And if you ever need to borrow money, your home equity is an attractive place to turn.
You have two main options: a home equity loan or a HELOC (short for Home Equity Line of Credit). Both are great ways to get money from your home's equity, but there are some important differences between the two loans. In this blog post, we'll talk about the pros and cons of each loan, as well as some common mistakes borrowers make with them. We'll also help you decide which loan is right for you.
What is Home Equity, and What’s a Home Equity Loan?
Home equity is the difference between the appraised value of your home and the total amount of money you still owe on your mortgage. For example, if your home is appraised at $1,000,000 and you still owe $500,000 on your mortgage, you have $500,000 in home equity. This home equity can be used as a source of financing for a number of different things, such as remodeling your home or consolidating debt.
A home equity loan is a type of loan in which the borrower uses the equity in their home as collateral. Home equity loans tend to have lower interest rates than other types of loans, and they can be a great way to consolidate debt or finance a large purchase. However, home equity loans are also a risky type of loan, as you could lose your home if you default on the loan.
What’s a HELOC?
A HELOC, or home equity line of credit, is a type of loan in which the borrower can access a line of credit against the equity in their home. HELOCs are similar to credit cards, in that you can borrow money up to your credit limit and make monthly payments on the balance. However, unlike credit cards, HELOCs often have lower interest rates and they can be used for a variety of purposes, such as home improvements, debt consolidation, or even investing in a small business.
Like home equity loans, HELOCs are also a risky type of loan, as you could lose your home if you default on the loan.
Now that we’ve talked about the pros and cons of each loan, let’s discuss some common mistakes borrowers make with them.
Common Mistakes with Home Equity Loans
One of the most common mistakes borrowers make with home equity loans is using the loan for something other than its intended purpose. Home equity loans are meant to be used for things like home improvements or debt consolidation. However, many borrowers use them for other purposes, such as taking a vacation or buying a new car. This can be a risky proposition, as you could end up defaulting on the loan and losing your home.
Another common mistake borrowers make is failing to shop around for the best interest rate. Home equity loans tend to have lower interest rates than other types of loans, but they can vary widely from lender to lender. It’s important to shop around and compare rates from different lenders before you decide on a home equity loan.
Common Mistakes with HELOCs
One of the most common mistakes borrowers make with HELOCs is accessing more money than they need. HELOCs offer a lot of flexibility, as you can borrow money up to your credit limit and make small, monthly payments on the balance. However, many borrowers end up borrowing more money than they need and then struggle to make monthly payments. This can put your home at risk of foreclosure if you default on the loan.
Another common mistake borrowers make with HELOCs is failing to pay off the balance before the draw period ends. HELOCs typically have a draw period, which is the amount of time you can borrow money against your line of credit. At the end of the draw period, the loan will enter the repayment period, and you’ll be required to pay off the entire balance within a certain number of years. Many borrowers fail to pay off the balance before the end of the draw period and then have to pay interest on the entire balance for the remainder of the loan.
When a Home Equity Loan or HELOC Might Not Be Right for You
There are a few situations when a home equity loan or HELOC might not be right for you. One situation is if you’re already struggling to make your mortgage payments. Taking out a home equity loan or HELOC will add another monthly payment to your budget, which could put you at risk of defaulting on your loan.
Another situation when a home equity loan or HELOC might not be right for you is if you’re planning to sell your home in the near future. If you take out a home equity loan or HELOC, you’ll have to pay off the loan when you sell your home. This could mean having to come up with a large chunk of cash at closing, which could be difficult if you’re not expecting it.
Finally, a home equity loan or HELOC might not be right for you if you don’t have a lot of equity in your home. Home equity loans and HELOCs are secured by your home, so if you don’t have a lot of equity, you might not be able to get a loan.
Get More From Your Home with the Best Orange County Realtors
Home equity loans and HELOCs can be a great way to get more out of your home equity. However, they’re also a risky type of loan, as you could lose your home if you default on the loan. Before you take out a home equity loan or HELOC, make sure you understand the pros and cons and common mistakes borrowers make with them.
Any time you make big decisions about real estate or loans, it’s best to first consult with a qualified financial advisor. As top Laguna Niguel and Orange County Realtors, we have a great network of vetted, trusted professionals with whom we are happy to connect you if you could use a recommendation.
Please feel free to reach out with any questions about your home value, home equity, or anything else in the real estate process. We are here to serve and happy to help! Contact us today.
Are you looking for more guidance? We are happy to learn about your situation and discuss your options with no obligation. Contact the Brad Feldman Group.