Pay higher interest rates and fees.
For the most part, expect to pay significantly higher interest on these types of Home Equity Loans. In many cases, the interest can be up to 6% higher than a typical Home Equity Loan, though it's possible you'll only have to pay 2% or so more. Moreover, you'll pay higher closing costs and other fees when it's time for payout. How much you'll pay depends on your personal situation--the lender, your credit history, your income, etc. But overall, expect to have much higher costs.
Pay Private Mortgage Insurance (PMI).
PMI is required on most mortgages where the down payment is less than 20% of the home's value. If you get a Home Equity Loan without any equity in your house, you'll have to pay PMI, too. The amount varies, depending on your lender, your home's value and other circumstances. However, it can easily tack on anywhere from $50 to $120 to your monthly payment. And you won't be able to drop PMI until you have 20% equity in your home.
Skip tax breaks.
In most states, Home Equity loan interest is tax deductible--any interest you pay during the year can be deducted on that year's taxes. However, because of the nature of these types of Home Equity loans, chances are you won't be able to take this tax deduction on April 15.
Although Home Equity Loans are often a cheap, smart way to borrow money from yourself, they tend to be the best deal if you already have equity in your house. If you try to borrow before you've built up some equity, you'll pay higher costs and get fewer perks.
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