Taking Out a Home Equity Loan
Put in simple terms, a home equity loan is a loan taken against your house. A home equity loan may also referred to as a second mortgage or equity release loan. When taking out a home equity loan, you are actually borrowing a proportion of the value of your home. If you own your home outright, then your home equity loan would be classified as a “mortgage”, otherwise if you still have an outstanding amount on your mortgage, but the house is worth more than the amount you owe, it is called a “second mortgage”. For the sake of consistency, this article will refer to both as Home Equity Loans.
Taking out an additional home equity loan enables home owners to release equity without having to refinance their existing mortgage. Many people believe that the only way to raise cash is by selling their homes. However reality finance is different and it is possible to take a second mortgage in order to repay the first mortgage and provide additional capital for debt relief or any other purpose.
Equity is the difference between the amount you currently owe on your mortgage and the value of your home at the time of refinancing. As an example, suppose you sell your home. The amount of cash you have left after paying off your mortgage is called Equity. This equity when taken as an additional loan, and without having to sell your home comes to be known as home equity loan.
Some lenders will also allow you to borrow much larger amounts that are calculated by subtracting your existing mortgage balance from an amount equivalent to around 125% of the market value of your property.
The rate of interest you pay on a home equity loan will depend on the options available to you from your chosen lender. The term of the loan, the amount you wish to borrow and your credit rating will al have an impact on the product available to you. The longer the term of the loan, the more you pay out as interest. The more you borrow, the more interest you pay throughout the life of the loan.
Always enter into a new loan agreement with a hint of caution. Assess all options thoroughly before making your final decision. Borrow only what you need and specify the term over which you will be able to comfortably afford the repayments. There is absolutely nothing to gain by accumulating liabilities in exchange for acquiring unnecessary assets.
As the loan is secured against property (which has “worth”), home equity loans are easily accessible to people who may have poor or bad credit rating due to the reduced risk to the lender.
Home Equity Loans often come hand in hand with lower interest rates, i.e. you get the loan at a lower cost compared to other loans because the lender has the right to foreclose on your home if you default on payments, but it is always worth remembering that the family home is at risk should you fail to keep up the regular repayments on your Home Equity Loan.
