Personal finance: The benefits of Home Equity Loan
What is Home Equity Loan?
A home equity loan is also known as an equity loan, home equity instalment loan, or second mortgage. The loan allows homeowners to borrow against the equity in their property. This loan is typically offered on a fully constructed property with a clear title. The loan amount is based on the difference between the current market value of the property and the owner's mortgage balance due. Make sure you have an excellent credit history and desired loan-to-value ratio.
Here's a suitable example: Amit and Geeta are a middle-class couple with decent jobs. They are suddenly faced with a fund crunch. They are apprehensive about withdrawing their savings as it would eat into their kids' education funds. They are not considering their PPF savings as it is their primary retirement plan. The only other option they are left with is getting a Home Equity loan against their residential property. Though they are still repaying the home loan for this property, they are sure that they can obtain a higher loan amount since this loan is determined based on the current market value of the property. The bank will consider the market value of the property minus the outstanding amount and offer a loan amount. They can still get a repayment tenure of up to 15 years and low interest rates, thus not putting a huge burden on their monthly cash outflow.
Benefits of Home Equity Loan
· Easy to qualify as they are secured loans. You can easily get approval on your loan even if you do not have an optimum credit score.
· It helps you to utilize the unused monetary value of your asset.
· Helps you to cover any large expense you may have as the loan amount paid to you is in one lump sum.
· Helps to plan and manage expenses better as the interest rate is fixed throughout the tenure.
· Home Equity Lines of Credit (HELOCs)
Fixed Rate Home Equity Loan
Fixed-rate loans provide a single, lump-sum payment to the borrower, which is repaid over a set time. The loan amount can be repaid over a set period at the agreed interest rate. In such loans, the rate of interest does not fluctuate depending on the market conditions and remains the same over the loan tenure.
Benefits of Home Equity Line of Credit
· This is a revolving credit facility which gives the flexibility to the borrowers to borrow the amount as per requirement.
· It is ideal if payments are to be made in stages as you can continuously withdraw loan amount in parts.
· Interest will be charged only on the amount you borrow.
How a Home Equity Loan Works?
A home equity loan works similarly to a home loan. In both cases, the home serves as collateral. However, for a home loan, the eligible loan amount is up to 90% of the market value of the house. Whereas, with a home equity loan, you can convert the equity on your home into cash. Repayment will include principal and interest payments.