Pros and cons of homeowner loans

© Izaokas Sapiro (Fotolia) Business woman advertises real estate on isolated background
© Izaokas Sapiro (Fotolia)
Pros
Security given
The key advantages of homeowner loans stem from the fact the person requesting the loan possesses a house. Firstly, this means the amount borrowed can be quite high due to the inherent value of the asset. As the home is being offered as security for the loan, there are also less worries regarding the borrower’s actual credit rating as the house acts as a guarantee.

This means there is less chance of the loan being refused.

Negotiation
As this is secured lending, the borrower can have a better negotiation position regarding repayment periods and interest rates. Both of these are worked out on a loan-by-loan basis.
Cons
Loan not repaid in time
As with all loans, there is some inherent risk involved. A legal agreement will have to be entered into and if the loan is not repaid on time, or payments are missed, there is the possibility of legal action and repossession of assets.

Possibility of losing the house
Due to the house being put up for security, the risk is greatly increased here as if there is a problem with repayments the house will be lost. Many people’s investments are entirely held up in their homes, so this can result in major financial problems and possible bankruptcy.

Period
Home owner loans are normally taken out for larger amounts and over longer periods of time so the possibility of problems arising can also be magnified.

Longterm financial stability
The size of the loans also brings into question long term financial stability. Secured loans are normally taken out to pay off existing debts or for major investment in an enterprise.

If a person is struggling to pay off existing debts, a large secured loan may also prove problematic and if it is an investment which goes wrong, the person stands to lose everything.

Interest rate
It is also worth noting the exact extra amount to be repaid through interest. Although the interest rate may not seem excessive on paper, the size of the loan means the extra amount to be repaid above the loan can register in the thousands.