All About Home Equity Loan Benefits and Risks

In the world of home equity loans there are undeniably two sides to deal with - those with benefits and those with risks. Through tapping into home equity values, fortunes have been made and loses have also been tallied. Digging into one's home equity is thus a daring and uncertain motion. Whether taking from one's home equity is due to household financial reasons, personal business desires or investing pursuits know that there are of course benefits, but also, weighted risks involved.

Notice: Home Equity Loans Are Not Without Risk

Typically, when any type of loan is taken out the individual taking out that loan should be aware of the risks involved. In the case of home equity loans, this same notion carries over, specifically for interest-only home equity lines of credit or what are commonly known as interest-only HELOCs. These types of loans are of a great advantage to individuals looking for some serious funding. HELOCs offer home owners a substantial amount of funds all at a fair rate. Yet, these types of loans aren't completely fool proof - they do have risks.

First, Consider The Benefits Attached to HELOCs

Home equity lines of credit are, on some level, quite similar to credit cards. Thus, what occurs when you get a HELOC is a bit akin to what happens with you get a credit card. A credit limit is given to you and you can take funds from it as needed or as seen fit. And the only interest paid here is on the amount of money you actually use or borrow. The only difference here between a HELOC and a credit card is that credit cards are unsecured, whereas money in a HELOC is secured in and against the equity value built up in your home.

Another benefit exists in the fact that if you are unhappy with your already reasonable HELOC rate that many lenders or banks will actually allow you to convert over to a fixed-rate HELOC; this is of course only possible if you feel the variable rate has inflated a bit. Better still, since these loans are interest-only types, payments are allowed to be focused toward only the interest for a specified length of time, ranging anywhere from the first five to ten years of the loan's life.

Benefits Are Initially Yours, But What Comes Afterward?

Once the start up and introductory periods are over a few things change. Your lender will up the amount due on your required payments, making loan payments rise and forcing you to initiate the paying off the substance of the loan's principal.

This said, it's essential that you know ahead of time -being before you apply for and get an interest-only HELOC- that you'll be able to afford the newly increased payment amounts once they're put forth. If you're using wishful thinking and banking on acquiring extra money (enough to satisfy the inflated payments) down the line then you shouldn't get a HELOC. Work within your budget and map out your financial future making sure that paying them from beginning to end is within your realistic means. If you don't prepare ahead of time and jump right in, it's quite possible to fall behind on making mortgage payments, which could in effect, smudge your credit and worse case, lead you to forfeit your home entirely.

Most importantly, you need to be mindful. Be aware of both the benefits and risks involved with taking out a home equity loan, whether it's an interest-only HELOC or not.