Saving, Managing Debt, and Budgeting

Home Equity

Why can a home equity loan be dangerous for homeowners?

There are many reasons why obtaining a home equity loan can be troublesome for homeowners. The equity that a homeowner gains as the value of his house increases over time can be loaned back to the homeowner, and paid back over time with interest. Most experts agree that it is inadvisable to obtain a home equity loan, especially when house prices are falling. If the value of your local real estate market plummets after you obtain a loan, you could be “underwater” on the mortgage, a very dangerous financial situation in which to find yourself. Obtaining a home equity loan may not solve the initial financial problem that led you to obtain the loan in the first place. You need to control expenses and improve income. A home equity loan may also artificially create a sense of higher income, which is dangerous if you cannot control expenses. And obtaining such loans or lines of credit may help perpetuate poor spending patterns, especially if you use the credit unwisely.


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