If you own a house, you have heard a lot of people talk about the benefits of a home equity loan when it comes to debt consolidation or home improvements.

It takes years to pay off a mortgage in Canada, and some property owners are concerned about extending the loan by taking out a second mortgage. However, the benefits of a home equity loan outweigh the risks. It is the most affordable borrowing option available.

Advantages of Home Equity Loan

If you are interested in taking out a home equity loan or want to know more about the built-up home equity in your property then this blog is for you. Below mentioned are the benefits of taking out a home equity loan:

Home renovations

One of the most common reasons to take out a home equity loan is that the funds can be used to renovate your property. Renovating your home can potentially raise the value of your property which could draw more interest from prospective buyers when you decide to sell it. Furthermore, by taking out a home equity loan for home improvements, you can deduct the interest paid on a home equity loan.

Pay off your college tuition fees

A home equity loan is a great way to fund a college education if your lender allows it. While it is the most common way to pay off your education loan, the use can be more beneficial as the home equity mortgage rates are lower than student loan interest rates. If you are looking to fund your children’s post-secondary education, then a home equity loan is the best alternative.

Debt consolidation

As mentioned earlier, a home equity loan can be used to consolidate high-interest debt at a lower rate of interest. Additionally, property owners can use their home equity to pay off other personal debts like a car loan or credit card etc. If you are struggling to make your scheduled monthly payments, it makes complete sense to consolidate your debt into a single easy-to-make payment to help you save a lot of money in the long run.

Take care of emergency expenses

Many financial experts agree that people should maintain an individual fund to cover at least three to six months of their living expenses. If you ever find yourself in an unfortunate situation where you are recently employed and have a large medical bill to pay, a home equity loan is a smart way to ensure you stay afloat. However, this is only a viable solution if you have a backup, or you know that your current financial situation is temporary. Taking out a home equity loan to cover emergency medical expenses can eventually put you in further serious debt if you don’t have a financial plan to repay it.

Covers your business expenses

A few business owners use their property equity to grow their businesses. If you have a business that requires capital to grow, you might be able to save money on interest by taking equity out on your home instead of taking out a business loan. The funds from a home equity loan can be used to invest. However, a return on investment in a business is not guaranteed.

Disadvantages of a home equity loan

While a home equity loan has several pros, there are also a couple of downsides when you decide to take this type of loan:

You could potentially lose your house

Because the borrower uses his property as collateral to secure the loan, if they default, they risk the chance of losing their home. If they fail to make their monthly loan repayments, the bank can potentially foreclose their house. Additionally, if the value of the property lowers, the borrower will end up owing more to the bank.

The borrower must have good credit for the loan to be approved

While it may be true that home equity loans offer a much lower interest rate than unsecured loans or credit cards. However, these loans are granted to borrowers whose credit scores are good.

The borrower must have substantial equity in their property

For the borrower to qualify for a home equity loan, they need to have at least 15 – 20% equity in their property.

If you sell the property, you need to pay off the balance loan amount

Since the home equity loan is tied to your house, if you decide to sell the property, you will be required to pay the balance loan amount. In a few cases, you can use the funds received from the sale to pay off both loans. But keep in mind, that if the value of your property decreases, it could put the borrower in a difficult situation.