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California Home Equity Loans - Disadvantages of Using Your Home's Equity

Because of home equity loans, homeowners have the opportunity to tap into their home's equity and acquire extra cash. Home equity loans and home equity lines of credit are very useful. For example, it is the perfect way to consolidate debts, make home improvements, or pay for college. Yet, there are certain disadvantages to using a home equity option.

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What are Home Equity Loans?

The basic concept of home equity loans is simple. Before a homeowner can obtain a loan approval from a bank, credit union, etc, the lender will require sufficient collateral. This way, if the loan is not repaid, the lender is able to claim your property and recoup their loss. With a home equity loan, homeowners use their home as collateral.

If you own a home, you've likely built some equity. Because of rising home prices, the equity in many homes has doubled in just a few short years. In a nutshell, equity is the difference in a home's market value and the amount owed to the home loan lender. The only way for a homeowner to touch their equity is to sell their home or obtain a home equity loan.

Inability to Repay a Home Equity Loan

Although these loans are based on your home's equity, home equity loans are not free money. Hence, the lender expects repayment. For the most part, home equity loans create a second mortgage. On average, the rates are fixed and the loan terms much shorter than first mortgages.

A danger that surrounds home equity loans is the inability to repay the loan. Home equity loans create a second lien on your property. If homeowners cannot pay either mortgage lender, they risk losing their home.

Avoid Borrowing Too Much

Just because your home has gained $100,000 in equity, this doesn't mean you should tap into the full amount. Overextending yourself may create a financial burden, which could make keeping up with regular payments difficult.

Additionally, those applying for a home equity loan should consider the possibility of a housing market crash. If home prices suddenly decline, those who acquired large home equity loans could end up owing more than their home is worth.

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