The home equity loan is the loan available by you in exchange for the equity in an investment property. A form of debt for consumers, home equity loan can also be referred to by the name of an equity loan or a second mortgage, or an installment loan based on home equity. It can be used to any purpose and can be used against residential and non-residential assets. The amount of the loan is determined on the basis the market value at present that the house is worth.
To be eligible for a home equity loan you must ensure that you have a good credit rating, acceptable rate of loan-to-value, and combined ratios.
How a Home Equity Loan Works?
The home equity loans operates similar to a home loan. In both instances the house serves as collateral. For an a mortgage on your home the loan amount that is eligible is as high as 90 percent of the value of the property. With the home equity loan you could convert the equity of the home to cash. The repayment will comprise principal and interest.
The types of Home Equity Loans
There are two kinds that home equity loans can be found. They are:
- Fixed rate loans
- Home Equity Lines of Credit (HELOC)
Fixed Rate Loan
Fixed rate loans allow an all-in-one lump-sum amount to the person. The loan can be paid back over a specific time at the agreed-upon interest rate. The interest rate doesn’t change in accordance with market conditions, and stays the same throughout the life of the loan.
Home Equity Line of Credit (HELOC)
Home Equity Line of Credit (HELOC) is a variable rate loan that works in the same way as the way credit cards work. It is also known as HELOC this kind of home equity loan permits you to take out a portion of the pre-approved amount provided from the lender. The loan can be provided in a bundle with credit card that allows you to make withdrawals from the loan, or by cheques.
Monthly payments will be based on the amount of money borrowed as well as the rate of interest. Similar to an credit card it is possible to borrow the amount that you pay back. HELOC is a fixed-term loan similar to fixed rate loans. That means, at expiration of the loan the total outstanding balance must be paid.
What is a home Equity Loan Functions
Home equity financing functions like a home loan. In both instances the house serves as collateral. In the case of an a mortgage on your home the amount of the loan that is permissible is as high as 90 percent of the value of the home. For a home equity loan you can convert the equity in your property to cash. Repayments will include principal as well as interest payments.
The benefits of home equity loans
- They are easy to qualify for since the loans are collateral-based. It is possible to get approval on the loan even if you have low credit scores because it is secured loans.
- Allows you to make use of the cash worth of the asset.
- It helps cover the cost of any major expenses you might have because the amount of loan paid to you in one lump amount.
- It helps plan and manage expenses more efficiently since the interest rate remains set throughout the duration.
Advantages of Home Equity Line of Credit (HELOC)
- Only borrow a fraction or all of your credit limits that is in line with the requirements of your situation.
- It is an option for revolving credit that allows you to borrow again the amount of your loan.
- It is ideal if the payments need to be paid in stages since you can withdraw the amounts of loan in parts.
- The interest is only charged on the amount borrowed.
Inequality Between Home Equity Loan and HELOC
|Factors||Home Equity loan||Home Equity line of credit (HELOC)|
|Disbursement||Lump-sum amount||Revolving credit line for a pre-approved amount|
|Repayment||Monthly payments||Interest only payments|
|Availability||Easily available in India||Not very common in India|
How do you calculate home Equity
The home equity loan is repaid by lenders after taking into consideration how much equity is in the home. The home equity in simpler definition is the difference in its value property and the obligations that are due to the property. Therefore, the formula is:
Equity = The current value of the house the amount that remains unpaid to the lender
For instance, if you’ve bought a home that is worth Rs.50 lakh and you have taken out a loan of Rs.40 lakh, the equity in your home will be Rs.10 lakh. In the end,
Value of the home (50,00,000) Total amount of loan to be paid (40,00,000) is Equity (10,000)
In the next few years, let’s say that the value of your home has grown to Rs.75 lakh. You have completed the repayment of half of the loan. There is just Rs.20 thousand in loan repayments however the worth of the home has grown. So the equity of the home will also rise in this scenario. Its equity would be:
Current value of the home (75,00,000) Total amount of loan to be paid (20,00,000) = equity (55,00,000)
As we have seen the equity of a house fluctuates from time to the. The equity of a home can decrease also. If the value of real estate has a drastic drop in a specific location, it will affect the value of a home in that area. This can negatively impact the equity of your home.
Be aware that if the property that you own does not have any obligation to lend, then your equity will be calculated based on the market value of your home.
What can I utilize the home equity loan to serve?
It is possible to use the home equity loan for any reason personal to you, from taking a trip to paying medical bills or covering tuition costs and planning your wedding and the list goes on. The loan does not need to be used to cover costs for your home.
Can I obtain the home equity loans the use of my home as collateral?
No. In order to get the loan you must have your home will serve as collateral, as the amount of loan will depend on the market value of your house. But, you could think about the possibility of a personal secured loan should you want to utilize other collateral.
Do you think having a great credit score required to get the home equity loans?
It isn’t required to have a high credit score to get the home equity loan since the loan is secured against the equity in your home. If you fail to pay on your loan, you might lose your home since the lender can take possession of your property to cover their losses.
How much is the max amount of loan I can obtain as a home Equity loan?
This will be contingent on the current market value of your home and also if you have loans to pay for the property.
Can I receive tax advantages if I apply for an equity home loan?
No. There aren’t any tax benefits that are available with this loan. The tax benefits only are offered on the principal and the interest component of a home mortgage.