What Are Some of the Pros and Cons of Home Equity Loans?


Quick Answer

The advantages of home equity loans, or second mortgages, include the ability to make improvements, consolidate other debts, purchase additional homes and avoid private mortgage insurance, as listed by About.com. The potential loss of homes as well as higher rates and fees than first mortgages are some of the disadvantages of home equity loans.

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Full Answer

People who take out home equity loans can tap in to large amounts of money if they have been paying down their mortgages or the values of their homes have risen since first purchasing the home, notes About.com. In these instances, homeowners can get home equity loans relatively easily, and they do not face the same borrowing limits they may have on their credit cards. Some homeowners take home equity loans if they made down payments of less than 20 percent in their original purchases because that triggered the necessity of purchasing private mortgage insurance. They use their second mortgages to increase the down payments applied to their first mortgages, which may help them avoid paying for the insurance.

The biggest disadvantage of home equity loans is that people who take them put themselves in jeopardy of losing their homes to foreclosure if they cannot pay off the loans, as About.com advises. Because home equity loans are riskier for lenders, they tend to have higher interest rates and associated fees than original mortgages.

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