30-Year Home Equity Loans: Advantages and Disadvantages You Didn't Think Of

If you're a homeowner looking to access the equity in your home for cash, a home equity loan may be the answer. Like a mortgage, these loans are secured against your home. While they share some of the benefits and drawbacks of mortgages, they also have some significant differences. Here's what you need to know about the advantages and disadvantages of these loans.

It's Easy to Apply

The application process for a home loan is similar to that of getting a mortgage, but simpler. Once you choose your lender, you'll provide your income verification (pay stubs and/or tax slips) and an appraisal will be done on your home to determine the property value and available equity.

Home Equity Loans are Tax Deductible

Because home loan interest is tax deductible, borrowers may get a nice tax break. This is a nice perk that other forms of borrowing, such as credit cards and unsecured credit lines don't have.

Pay for Big Expenses With Small Monthly Payments

The long loan term (three decades) means 30-year home loan payments are small compared to loans with shorter terms, such as 10 or 20 year loans. This benefits households on a tight budget.

They're Flexible

Unlike borrowing for for specific purposes, such as car loans or student loans, home loans have no restrictions on what borrowers use them for. Helping a child pay for college, home renovation, and even costly medical bills can be covered with the proceeds of these loans.

Simplifies Budgets Through Consolidation

For homeowners with multiple credit cards, loans, lines of credit and other payments, home loans may help simplify monthly budgeting through consolidation. This means using the home loan money to pay off and close the other debt. A consolidation means just one monthly payment instead of many small ones.

Though a home loan has several benefits for borrowers, there are also drawbacks to this form of borrowing.

Setup Costs

Like a regular mortgage, setting up a home loan costs money. Prepare for legal fees, title search and insurance fees, application fees, and appraisal fees.

30 Years is a Long Time!

Despite the benefits, making payments for another 30 years won't appeal to everyone. In addition to the fact that longer loan terms usually mean paying more interest than you would with a shorter term, your age, career stage, and long-term plans may mean a long-term loan just isn't an option for your situation. If this is the case, consider a 20 year home equity loan instead.

It's Another Monthly Payment

When you borrow money, you have to pay it back - it's a simple fact of life. And unless you're able to make one lump sum payment a loan against your home will require regular monthly payments. Other than consolidation situations in which other debts are paid off with the loan proceeds, a new loan means an additional monthly payment for borrowers.

It Uses Up Your Equity

Your home may be your most valuable financial asset. Borrowing against it with a loan uses up some of the equity you've worked so hard to build. Yet if you don't make your payments, the lender may require you to sell your home to pay them the money they lent you, plus interest.

May Be a Limit on Draw Period

If you get a traditional home loan, it's likely that you'll receive a lump sum of money at the beginning of the term to be used for whatever you like. However, you may be considering a home equity line of credit (HELOC) with a draw period instead. This means you are restricted to withdrawing money during a certain time period, after which you are only permitted to make payments. For example, you may only be allowed to draw down on the funds in the first ten years, and during the last 20 years you may only be able to make payments.

Ready to learn more about this type of loan and to compare loan rates? Visit Lending Tree's free Home Equity Loans tool for a free quote and more information.

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