Home Equity Loans: Here’s What You Should Know
There is no doubt regarding the fact that the property prices continue to rise, irrespective of the economic situation. This also means that a homebuyer who is already paying a home loan is getting equity-rich, meaning that their outstanding loan principle is worth less than 50 per cent of their home value. Hence, this might be the right time for owners to leverage their home equity line-of-credit or loan for funding their emergency needs.
What are home equity loans?
It is a type of loan or line-of-credit extended to house owner against his equity in the home. The lender goes through the credit history of the applicant and the property documents before approving the loan. The loan amount can be used to finance home repairs or any emergency situation. The loan is basically the second mortgage and if remained unpaid, the collateral will be sold to clear the remaining debt.
How is equity calculated?
Equity is the difference between the current value of the house and the outstanding loan amount. Suppose, Mr X obtained Rs 40 lakh loan for Rs 75 lakh property. After 5 years, the property value is Rs 1 crore and the outstanding amount is Rs 20 lakh, the equity will be Rs 80 lakh.
There are two types of home equity loans:
*Fixed rate loans provide a single payment to the borrower which is repaid over a set duration at a decided-upon interest rate.
*Line of credit loan is an arranged and agreed amount of standing credit that the homeowner can draw upon requirement. The applicant can make a one-time payment or can repay in installments.
Things to know about home equity loans
*Any increase in the market value of the property or a decrease in the outstanding home loan results in a rise in the home equity.
*The loan is available against both- residential and non-residential property. However, it should be fully constructed and should be a freehold property.
*The documents establishing the financial and repayment capability of the house owner have to be provided, along with the documents of the
*A home equity loan does not offer any tax benefits as is available to the homebuyer in the case of a home loan.