Fixed Rate Home Equity Loan: The Pros and Cons

People borrow a fixed rate home equity loan for various purposes. Business men take home equity loans for expanding the business. Many people use these loans for education of their children while other may use home equity loans for renovating or expanding a house. 

The ‘Home equity' value is arrived at by calculated the difference of present market value of the house minus all outstanding balance of liens on the house. The present market value of the house is assessed by the values based on the recent historic data and trends in the real estate market. These loans are often referred as second mortgage loans. The fixed-rate home equity has a credit limit and is a lump sum amount, which is at a fixed rate of interest.

The banks will consider many things before giving a home equity loan. Individuals with a good credit history will get preference for approval of loans. One may not get a home equity loan, if credit history is bad due to not paying the earlier loans. Besides credit score, the present regular income is another criterion for securing a home equity loan.The fixed rate home equity loans have many pros and cons associated with them:

Pros of Fixed Rate Home Equity Loans

The fixed interest rate home equity loans have several advantages.

Simple Process

It requires a simple and inexpensive process to be followed to apply for these loans.

Different Purposes

These loans can serve your needs for different purposes like: business, medical costs, emergency requirements, children's education, debt consolidation, home renovation or expansion.

Tax Rebate

You get a tax rebate on the loans, if you produce the relevant documents. 

Insurance

Some lenders provide the insurance cover to the borrowers along with the loan sanction.

Fixed Repayment and Stability

As the rate of interest is fixed, the monthly repayment is also fixed unlike a variable interest loan where the interest rate may go down or overshoot disturbing your repayment capacity. You can plan your monthly budget and the payments on schedule. They provide more stability as you can plan the money required for repayments. You can plan your finances.  The loans also reduce  your risk of getting  into debt, as it is easier to keep  up with your payments because they will not go up every month due to increase in interest rate.

Long Term Benefits

Even if the interest rate is fixed, in the long run these home equity loans are more beneficial and you can plan to clear your debt.

Cons of Fixed Rate Home Equity

These loans have downsides as well.

Risk of Default

 Banks prefer to get property as collateral for advancing the home equity loans.  In case the home owner defaults to pay the installments, he may incur the biggest loss by losing the ownership of his property. The bank can auction the property to recover the money.

Risk of Winding Up

Considering the long duration of the loan, there may be serious problems due to the steep decline in the market value of the properties. These sharp decreases in the home prices are very common during recession. In such a situation, if your debt is more than the worth of your home, you may be forced to sell your home to pay off everything and even run into debt.