When shopping home equity loans, it's important to understand how the loan repayment term affects payments and the interest you'll pay. The shorter the loan repayment term, the higher your payments will be. The faster your repay your loan, the less interest you'll pay. If a 10-year repayment term seems too short and a 30-year repayment term doesn't work for you, a 20-year loan term may match your needs. Here are a few considerations that can help you find the right option for equity financing.
20-Year Home Equity Loan: Pros and Cons
The good news:
- Home loan rates are typically lower than rates for unsecured credit: A home equity loan is secured by your home and is less risky to lenders than issuing unsecured credit. Your interest rate on a 20-year equity loan will likely be lower than for personal loans and credit cards.
- A 20-year equity loan may be the best fit for your budget: Payments on a 10-year equity loan may be too high for your budget, but stretching payments out to 30 years may not be the best solution as you'll potentially pay more in interest over the life of the loan. This is not an issue if you plan to sell or refinance your home in a few years.
- Consolidate consumer debt: You can take advantage of lower rates available with home equity loans to streamline bill-paying chores and possibly save on interest. The shorter term of a 20-year home equity loan helps you pay off your loan faster and with less interest than revolving debt that typically carries a higher APR than mortgage loans. Interest paid on home equity loans may be tax deductible; interest paid on consumer debt is not. Consult your tax professional for more to see if this benefit applies in your circumstances.
Potential drawbacks include:
- Equity financing reduces your equity cushion: At the start of the recession, more than one third of homeowners owed more on mortgages and home equity loans than their homes were worth after property values declined. Your home equity helps guard against this; if you borrow against most of your equity, you'll have less protection against downturns in housing markets.
- Home equity loans can be foreclosed: Equity loans are called second mortgages for a reason. The Federal Trade Commission explains that your lender holds a security interest in your home until your equity loan is repaid. If you fall on hard times and cannot make payments, your equity lender can foreclose and take title to your home. Home equity lenders can also foreclose if you default on your primary mortgage payments. If your primary mortgage lender forecloses, your equity lender loses its security interest in your home. Your equity lender may protect its interest in your home by advancing payments to your first mortgage holder if you don't make timely payments.
- Debt consolidation with equity financing doesn't eliminate your debts: The Consumer Financial Protection Bureau reminds homeowners that debt consolidation transfers debt from several accounts to one account (your home equity loan). If you incur more debt, you'll owe more on home mortgages and consumer debt than before you consolidated your debt with an equity loan.
Discussing your plans for an equity loan with a financial advisor can help determine if a 20-year home equity loan is the right choice based on your needs and goals. When you're ready to shop and compare equity loan options, our network of lenders can provide quick home equity loan quotes.