The Risks Involved with a Home Equity Line of Credit

A home equity line of credit is simply a loan that uses the equity that you have built up in your home as collateral. It works a lot like a regular line of credit but it is a secured loan.

While this kind of loan offers many advantages, there are risks and disadvantages that you have to keep in mind. Many people who have taken this kind of loan have benefited greatly from it while others have regretted taking out the loan.

Advantages of a home equity LOC

There are a number of advantages that come along with this loan type including:

Financing

If you are looking for finances to start or expand a business or to invest is a profitable venture, you can take advantage of the loan to access funds for financing.

Interest rate

The LOC interest rate is much lower than the interest you would have to pay on a credit card.

Emergencies

Let’s face it – sometimes emergencies can come up in life and often we just aren’t prepared for them. When you built up equity in your home it acts as a safety net. If an emergency should arise, you’ll know that the equity funds are there should you need them.

Home equity LOC disadvantages

Even considering the advantages listed above, you should also think about the disadvantages that include:

Repayment

As with any type of loan you are going to have to factor in paying off the loan when you make up your budget. If you are experiencing an emergency, it may not be the best time to take on more debt.

The ultimate loss

If things really fall apart you are ultimately putting your house on the line. Are you really ready and able to take the risk? If you are currently still paying off your mortgage as well, you will need to be sure that all of the repayments can be covered every month without fail.