Real Estate 049: (Guest Post) Thinking of getting a Home Equity Loan? Lets talk pros and cons!

As the real estate market continues to heat up in many of the major cities across the United States, Real Estate Investors may be looking for different ways to stay liquid and fund their next project. I have spoken about traditional lending, private lending, hard money, and retirement accounts on this blog. However, our guest writer Raúl Menéndez from Money.com talks about the pros and cons of obtaining a Home Equity Loan and how it can be used for various use cases.

Home Equity Loans Pros and Cons

“Equity is the amount you get after subtracting your mortgage balance from your home’s current fair market value. In other words, home equity is the figure that represents how much of that property you actually own. There are a few ways of accessing your home equity, but one of the most common and less risky ones is through a home equity loan.

Just like its name suggests, a home equity loan is a type of installment debt that allows you to borrow against your equity. With this type of loan, you borrow a certain amount at a fixed rate, which is then disbursed on a single-lump sum and is repaid through a series of regular monthly payments for a set period of time, also known as the “term.” By contrast, other options such as a home equity line of credit (HELOC) don’t give you a lump sum payment.

Since you’re using your home as collateral, interest rates tend to be much lower than those of unsecured debt, like personal loans and credit cards. The lower rate allows you to borrow a sizeable amount with comparatively low total interest. Also, these loans usually have fixed rates, so your monthly payments won’t fluctuate.

Home equity loans may also qualify for certain tax benefits if it’s used to make improvements to your house. In that case, you’d likely be able to deduct the interest on your loan payments from your taxable income, potentially reducing the amount you have to pay in taxes.

Finally, home equity loans are flexible in that you can use your lump sum payment for whatever you desire. Of course, that doesn’t necessarily mean that you should, but you have the freedom to use your funds as you see fit.

While a home equity loan can be beneficial in the right circumstances, it does have its potential drawbacks. One of these drawbacks is simply the fact that you’re taking on more debt. If you’re still making mortgage payments, you’ll have to add home equity loan payments to your monthly expenses.

That could limit your ability to borrow funds since many lending options have DTI requirements. If your total amount of monthly debt is above a certain percentage of your income, you might not qualify for certain loans. By securing your loan with your home as collateral, it does potentially put your home at risk. If you default on your home equity loan, it may mean losing your home.

As with many borrowing options, home equity loans have a full closing process, and that will mean fees. For that reason, it’s advised that you evaluate your current expenses and options to make sure the closing costs and fees are worth it. If you want to read more about these types of loans ad their advantages and disadvantages head over to Money's Best Home Equity Loans article to read more.”

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!