Disadvantages of home equity loans

Category: Loans

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A home equity loan is when you borrow money against your home’s value. As a result of borrowing against your home’s equity, your home is used to secure the loan and is used as collateral in case you default on payments. A consumer might take out a home equity loan if they’re experiencing significant financial problems and have enough equity in their home. Before turning to this type of loan, however, you’ll want to carefully think about some of the drawbacks of home equity loans:

Balloon payments

Depending on the type of home equity loan you’re taking out, you may have to make a balloon payment. A balloon payment is a very large payment that you must pay in one lump sum, and usually towards the end of the loan term.

Some borrowers might take out a home equity loan without being fully aware that they will have to make a balloon payment. Other times, borrowers have full intentions of being able to make their balloon payment, but their financial situation hasn’t improved and they can’t afford to make the balloon payment. For these reasons, the Federal Trade Commission (FTC) stresses that homeowners should carefully review all terms and conditions of a home equity loan that they’re considering, and that they fully understand the repayment policy.

Extra fees and interest rates

When you borrow money through a home equity loan, it means more fees and interest to worry about—on top of what you’re already paying with your current mortgage payments. Home equity loans can come with high interest rates, making it difficult for the borrower to pay back.

Your home will be in jeopardy

Consumers don’t expect to default on their loan payments and lose their home. They realize what they’re risking, but they are sure that their financial situation will turn around and they’ll be able to completely pay back the home equity loan. Although most people don’t ever expect to fall behind on their loan payments, life can be unpredictable. Their financial situation could get even worse or something unexpected can happen, making it impossible to make timely payments. When this happens, your lender has the legal right to seize your home.

You may have other options

Instead of turning to risky loans to solve financial problems, you may want to explore your other available options first. If you’re receiving long-term payments from an annuity or structured settlement, the periodic payments might be helping, but perhaps they’re not enough. But that doesn’t mean there aren’t ways you can receive your money sooner. By selling some or all of your future payments to Peachtree Financial Solutions, you can receive your cash in one lump sum. Receiving a lump sum payment from Peachtree can make it easier to pay off debt and catch up on expenses. Contact Peachtree Financial Solutions today to learn more about selling some or all of your future payments for a lump sum and to receive your free quote.

 

Nothing above is meant to provide financial, tax, or legal advice. You should meet with appropriate professionals for such services.

Tags: balloon payments, home equity loans, interest rates

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