Posted: 1 Jun '22

The Pros and Cons of a Home Equity Mortgage Loan

The Pros and Cons of a Home Equity Mortgage Loan

Home equity mortgage loans are a type of second mortgage loan where you receive a lump sum based on the equity you've built on the property. Your home equity simply refers to the difference between the property's current value and the amount you owe on your mortgage. You can secure a home equity mortgage loan from your first mortgage lender or another lender with better deals in the market.   

Before going for home equity mortgage loans, it's necessary to understand the advantages and disadvantages of second mortgages. We've rounded up the pros and cons below, including some second mortgage alternatives. Call us today to learn more.

Advantages of Home Equity Mortgage Loans 

If you are to take a home equity mortgage loan, here are some of the benefits you'll enjoy:

  • Fixed Interest rates. Unlike the other loan products in the market, the interest rates on home equity loans are fixed throughout the loan's lifespan. This allows you to plan your loan repayment regardless of the market conditions.
  • Freedom to use the money as you wish. Once your home equity mortgage loan is approved, you can use it to fund any goal.  
  • Lower borrowing costs. By using your home as security/collateral, you get lower interest rates, reducing the borrowing costs. Therefore, home equity loans are cheaper than credit card loans or unsecured personal loans.
  • You can use interest payments to lower the tax burden. If you direct the home equity loan to home improvement projects, you can deduct the interest payments from the taxable income. 

Disadvantages of Home Equity Mortgage Loans 

Home equity mortgage loans aren't without their disadvantages. Here are the main ones that you should be aware of:

  • You could lose your home to foreclosure. If you default on the loan, your home will be sold to settle the outstanding amount.
  • There are some closing costs. This loan comes with a fee and closing costs, which fall between 2% and 5% of the approved loan amount. 
  • Home equity loan rates are higher than HELOC rates. Home equity lines of credit (HELOC) loans come with lower interest rates than home equity loans. This is because HELOC rates aren't fixed and will fluctuate from time to time.
  • Repaying two loans can be overwhelming. Making two mortgage payments per month requires proper financial planning, lest you'll have to compromise your other financial goals.

Home Equity Mortgage Loans Alternatives 

Besides the home equity loans, you can explore the other money lending opportunities such as:

  • HELOC loans – as stated earlier, HELOC is a second mortgage loan that gives you access to a line of credit. It allows you to borrow continuously over a loan's borrowing period. You'll qualify for subsequent credits up to a given limit during this period, and you may be required to repay the interests only.
  • Cash-out refinances – this is a type of mortgage that takes advantage of your equity, giving you cash in exchange for taking a larger mortgage. In other words, you borrow more than you owe the mortgage lender and pocket the difference.
  • Unsecured personal loans - come with higher interest rates since the lender is taking on a higher risk. If you don't qualify for a mortgage or car loan, this could be your only option.  

Choose What Works for You 

Home equity mortgage loans are often an attractive option for people who have built some equity on their homes and need a lump sum. That said, it's necessary to pay attention to the pros and cons of these loans before making up your mind. And depending on your unique needs and the current financial situation, you may also opt for any of the home equity loan alternatives stated above. Call BMC Mortgage & Investments today to discuss your options.