Advantages and Disadvantages of Borrowing Against Your Home

Borrowing against your home is called home equity. Home equity is the value of your property after deducting your remaining mortgage balance and is one of the sources of income for homeowners. After ultimately paying off your mortgage, it’s possible that the value of your property increases – which also increase your equity amount. 

If you live in a neighborhood that improved in quality over time, the value of your home may get appraised at a higher value than the initial cost of purchase. Borrowing against your home means using your home equity as collateral to take out a loan. Using your home equity to lend serves as a guarantee to the lender that you will pay the  loan back. If you default in repaying the amount borrowed at the stipulated time, the financial institution may evict you out of your home and put it up for auction. Borrowing against your home is a risky decision to make and one that requires due caution. After paying off your mortgage of about thirty years, it would be regrettable to lose your property to a home equity loan. 

There are various reasons why homeowners seek to borrow against their homes - if properly used, it could be a sizeable benefit to the owner. The equity loan debt repayment is usually for five to fifteen years. There are two options for granting equity loans; the large lump sum of cash or the equity line of credit. 

Using the large lump sum of cash method allows you to take a considerable amount up front which you repay overtime in fixed monthly installments with a fixed interest rate.  The equity line of credit has a more flexible plan, and you might get approved for a maximum amount available. Out of the amount agreed, you can borrow the amount you require and also borrow multiple times from the amount approved. The disadvantage to this option is that lender can freeze your line of credit unexpectedly even before you get the chance to use the money. 

The advantages of borrowing against your home include:

• It comes with a fixed interest rate that’s usually lower than other forms of loans
• It’s a more accessible alternative to get a considerable amount of money in a short time. 
• It’s secured on your house value.
• You get cash when you apply for an equity loan.
• You can remain in your home while repaying the loan

Disadvantages of borrowing against your home:

• You have to make monthly payments.
• Failure on your part to repay the loan would lead to giving up your property. 
• The cost involved in getting an equity loan might push a borrower into more debt.
• After acquiring the equity loan, you still have to pay your regular property taxes, maintenance cost, and your home insurance bill. 

Be careful when deciding to borrow against your property. Be sure you have all the information you need and a solid financial plan.