Have you ever heard of Home Equity Loan? If not here’s your chance to explore it. Home Equity Loan is considered an alternative to lending institutions where you may borrow money based on the value of your home. Sounds interesting? Read on! We will discuss the Home Equity Loan in detail. From its types to its pros and cons, we have got you covered!
What is a Home Equity Loan?
The home equity loan is offered against the appreciation of your property’s market value from banks or lending institutions. In simple words, it is the amount between the exact value of your house and the amount which you owe to the lender. Here, in case of emergency, your home can act as collateral against the funds you borrow. In addition, the interest rates for home equity loans are reasonable when compared to those for other types of loans. The interest rate, however, is fixed, and the loan will be authorised only if you have enough equity in your property to cover the mortgage.
With every mortgage payment, your equity increases. The lending institution can offer you a loan maximum of up to Rs. 10 lacs. However, it further depends upon your eligibility and capability to repay the loan.
The home equity loan is calculated based on a formula:
Equity = Current worth of the home – the total amount owed to the lender
Types of Home Equity Loan
The financial institutions can lend you two types of home equity loans
a) Fixed interest rate
As the name suggests, fixed interest rate means the home equity loan offered at a fixed interest rate which has no relevance to the market fluctuations. These loans are offered at a fixed amount of EMI comprising of interest and principal components. With a lump sum amount, you get a fixed repayment tenure. It is easy to qualify and avail of fixed-interest loans. With this loan, you can utilize the market worth of your cash home which otherwise remains unused.
b) Home Equity Lines of Credit (HELOC)
The home equity lines of credit, work on the variable interest rate which means, their interest rates keep fluctuating based on market fluctuations as a result, each EMI varies. It is similar to a credit card where you get a pre-approved loan from the lending institution. Here, the repayment of the loan amount is to be paid on completion of the tenure. Post repayment of your loan, you can again avail of the pre-approved loan amount. This loan is typically promoted or offered as part of credit card offers.
What are the advantaged and disadvantages of the home equity loan?
Whenever you plan to borrow a loan, it is essential to know the pros and cons of the product before availing of it. Plus, you should also calculate your expenses and analyse whether you are capable of repaying the loan borrowed.
Here are a few points that can help understand both sides of the home equity loan
| Advantages of Home equity Loan | Disvantages of Home equity Loan |
|---|---|
| Flexible requirements | Extremely stringent eligibility criteria |
| Qualify easily | Individual are not preferred |
| Fixed rate of interest | Putting your home at dual risk |
| Low interest rate | Prepayment cost is applicable |
| Offer lump sum amount | Offer much lower amount |
How do I know if a home equity loan is the right choice for me?
Well, this completely depends on your financial and mental condition. If you are willing to borrow a home equity loan, you should be mentally prepared to repay two loans at a time i.e., a home loan and a home equity loan. However, for ease of convenience, this loan comes with long repayment tenure which ensures that the repayment cost isn’t affecting much on your pocket much.
