CARTOONS BY CHRIS BRITT

DISADVANTAGES
Loss of assets. If you fail to pay back the loan as agreed, your property can be foreclosed
upon by the lender.
Time. Because of the appraisal requirements and lender backlog, it can take up to six
weeks or more to get the requested funds. It is not a good option if you need cash quickly.
Costs. You will have to pay closing costs on your home equity loan, similar to what you
did with the mortgage. These costs can be between $3,000 and $6,000, depending on the
amount of the loan.
Interest rate risk. HELOCs usually come with variable interest rates that are based on the
prime rate. That means your payments will rise or fall and make it difficult to budget.
HOME EQUITY EXAMPLE
Ron bought his house 10 years ago for $100,000. He is looking for low interest money
to start a business. Today, the realtor told him that his house was worth $250,000 because
of the improvements he made to the property and overall market appreciation. Based on
this valuation, Ron has $150,000 of equity in his home. He applies for a $100,000 home
equity loan at his local bank and it is approved. He receives the money at 4% interest fixed
for a 20-year term. At closing, Ron gets a check for $100,000 minus the closing costs and
fees. He now has available cash to purchase materials to start his business.
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