Home Equity Loan
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A home equity loan is a type of loan in which the borrower uses their home’s equity as collateral.
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Such loans are similar to auto loans but have different terms and conditions. The following are the main differences between a home equity loan and an auto loan:
There are no down payments required with a home equity loan.
The interest rate on a home equity loan may vary depending on the amount borrowed, how long the loan lasts, and whether or not you have enough cash reserves to pay it off within ten years.
What is a Home Equity Loan?
A home equity loan is a secured loan that can be used for renovations or repair work. This type of loan allows a borrower to access their home’s value as collateral. It is important to note that if the borrower defaults on the loan, the lender may foreclose on the home.
One of the advantages of owning a home is the ability to accumulate equity in your home when you pay your mortgage. However, over time, your equity can provide you with opportunities to build wealth by allowing you to take out an equity loan for your home.
Types of Home Equity Loans
There are many types of equity home finance. Choose the loan that best serves your need.
A lump sum home loan is similar to a standard home loan. In contrast, you can borrow an approved amount and pay the required repayments (including interest) for a specific time.
Typically, a lump-sum home loan comes with an interest rate fixed with specific terms. In comparison, you must be able to repay the loan in full well before the time or can sell your home.
Refinancing is among the most commonly used methods to tap into your home’s equity. Additionally, a borrower can refinance through the current lender (internal refinancing) or use an alternative creditor (external refinancing). Contrastingly, Before refinancing your home, it needs to be appraised to determine your home’s current value. Suppose your home has appreciated since you purchased it. In that case, your lender might allow you to refinance based on its present value, which will allow you an opportunity to access the capital you’ve earned through mortgage payments.
It is vital to remember that since you’re taking equity out of your home, it is necessary to repay it at some point, along with interest.
Cross collateralization occurs when you use the equity you’ve built on one home to purchase another. In contrast, it is a non-favourable option in certain situations as the current property and the home you’re looking to purchase become security for the loan. Nonetheless, you may lose both properties if the mortgage is not repaid. Therefore, you must know that you can cross-collateralise with only one lender.
Generally, if your mortgage comes with the option of redrawing, you’ll be able to take advantage of the equity you’ve earned by drawing it down.
Redraw facilities allow the borrower to make additional repayments to their mortgage and then draw (or draw down) from them later. In addition, the extra payments you make, collected through the redraw facility, are independent of the regular mortgage payments; this is why they’re accessible to draw down.
A shared equity home loan is a type of mortgage where the lender and the borrower share the ownership of the property.
How much can I borrow?
Typically, various lenders have different guidelines regarding how much loan they provide to the home equity loan. However, it does not mean you can get the entire amount if you have equity.
Most lenders will require that you keep at a minimum of 20% of the value of your home to secure your mortgage. Contrastingly, if you’re planning to tap the equity in your home but have more than 80 per cent of the home’s value, it could be legally required to pay Lenders Mortgage Insurance (LMI).
You can determine the home amount using the following formula:
(Home’s Value x (Home’s Value x) Mortgage Balance = Equity Accessible
For instance, in this case, the house value is $700,000. Whereas if the remaining amount on your mortgage is $300,000 and the equity in the credit is 400,000. To calculate the amount of available equity, you must determine the difference between 80% of the home’s worth and the outstanding balance.
($700,000 multiplied by 0.8) ($700,000 x 0.8) = $550,000
In this instance, it is possible to get access to $560,000 of your equity of $700,000. If you borrow more than that, you will have to pay LMI.
How do you increase the equity value of your home?
Several lenders advise many ways to build equity against your home; however, the most basic and most well-known is decreasing the amount you owe to the lender and increasing the value of your property.
When you pay back a loan that you make, the equity in your home grows. Further, you can build equity more quickly by making extra payments on your mortgage principal when you can pay for it.
Nevertheless, The current market conditions can significantly impact the amount of equity your home accumulates. Whereas, If the price of houses increases and continues to rise, your house will likely have a higher value than it was when you first got your mortgage.
Value of the home or property increases
Generally, there is no hard and fast rule; you increase property value by making intelligent renovations. However, the home skyrockets the value of its equity if it’s possible to draw on the equity to finance your home renovations with a loan.
Utilising home equity to increase the standard of life and cover emergencies
Furthermore, you may also be able to use the equity within your home to pay for various personal expenses like the cost of a child’s education, a wedding, a new car or even a trip.
What are the benefits of using a home equity loan?
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Experts advise before obtaining your equity loan
Take care when considering Line of Credit loans: You have to understand the purpose of the loan first. Since you can access your money with an ATM at any time, it may become more challenging to spend prudently. Whereas, if you believe this could cause a financial burden in the future, look into an alternative home mortgage instead.
Ideally, the best way to consolidate debt is once. At the same time, if you have to pay off debts more than once in your life, the issue might be how you manage your finances. After you’ve completed a debt consolidation loan, don’t apply for other personal or credit card loans.
If you choose to do this, you could get caught in a loop of consolidating and spending, leading to losing your equity. In extreme instances, individuals borrow to finance their lifestyle until they reach retirement but can’t retire since they have mortgages.
Equity that you don’t own, we frequently receive calls from those who have recently bought a home and wish to let equity go. In contrast, if you have purchased a house in the past couple of years, then it’s unlikely you have the capital to let go. You can determine the amount of equity you own with our home equity experts.
Case Study: Using Home Equity Loan to Purchase a House in Victoria
Being rejected by banks, she approached us for a loan. We quickly collected her documents, connected her with the lender and approved her loan. She received her applied amount of loan within 48 hours.
Frequently Asked Questions (FAQs)
How much can I borrow with a home equity loan?
You can borrow up to 80% of the total value of your home — or $100,000, whichever is less — minus any existing debt on that property, such as credit cards and mortgages. You may also be able to qualify for additional borrowing limits based on your credit score and other factors.
Are there any costs associated with applying for a home equity loan?
Yes, some costs are associated with applying for a home equity line of credit (HELOC). These include origination fees, late fees and an application fee. We will provide you with all such details so you don’t have to hassle with the process.
How do I get a Home Equity Loan?
You can apply for a Home Equity Loan through our website or by inquiring via phone. We can process your application immediately if you have an existing HELOC with us. Otherwise, we will need to gather some information from you before we can begin processing your application. This includes verifying your identity and sufficient income and assets to qualify for this loan.
How much can I borrow from a Home Equity Loan?
The amount you can borrow from a home equity loan varies depending on several factors, including your credit score and history.
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