What is Home Equity Loan?

The true meaning of the phrase “Your home is an Asset" is better understood when your house comes to your rescue during a financial crisis. Even if you already have a home loan, there is an option to take a second loan on your house , which can be a true blessing, especially during a financial crisis.Read on to know how your house can end up giving you a lifeline during an emergency.

A home equity loan is different from a regular home loan , also known as a mortgage. In a mortgage, the loan is given by keeping the house as collateral which means the lender can seize your property if you fail to repay the loan or default on your payments.However, a home equity loan is given on the basis of equity in your house. The loan amount depends on the current market value of your house minus the remaining balance of your mortgage.

Benefits of Fixed Rate Home Equity Loan

• Easy to Qualify : Usually, loans are approved based on the credit score of the borrower. Since a home equity loan is given against the equity of your house, you can get it even if your credit score is low.
• Better Management of Funds : Since the rate of interest is fixed and you know how much you have to pay every month, you will be able to manage your finances properly.
• Easy to Cover Large Expenses : You will get a one-time lump-sum amount with a home equity loan, making it easier to cover huge expenses.

Benefits of HELOCs

• Lower Interest Rate: The interest rate in HELOC is less than the rate of interest of fixed-rate home equity loans and even credit card loans.
• Flexibility: HELOC is very convenient to use. It gives you the flexibility to borrow money as and when required, and you pay it back based on what you use.
• Pay Interest on Amount Borrowed : Since you borrow money as required, the amount that you don’t use is free from interest. The interest is levied only on the amount you borrow.

1. Fixed-Rate Home Equity Loan This type of loan comes as a single lump-sum amount and has to be paid back over a fixed period at a fixed rate of interest. You can use this loan if you need a large amount of money for a big expense like a wedding or a hospital expense. Since the interest rate is fixed, you will be aware of the exact amount of your monthly payments.
2. Home Equity Lines of Credit (HELOCs) In this, you are given a line of credit up to a maximum amount, but unlike a fixed rate home equity loan, you do not have to use the whole amount. You only spend what you need as required. Furthermore, you have to pay the interest only on the amount that you have borrowed.The borrowing period is typically 10 years. After that, the time to repay begins, which is 15 years.HELOC is best used if you need money for renovating your house or paying off other high-interest loans like a student loan or automobile loan. However, you have to be very responsible with your spending with HELOCs. If not, you might end up accruing an enormous debt.

The amount of home loan equity is based on the home equity. So, it is essential to understand how it is calculated.Suppose the current value of your house is Rs. 10 lakh, and you take out a loan of Rs. 4 lakh. So, Home Equity = Current Value of the Property (Rs. 10 lakh) – Loan Payable (Rs. 4 lakh) = Rs. 6 lakhHome equity can vary from time to time. For example, if in the next 10 years, the value of your house increases to Rs. 20 lakh, and you pay Rs. 3 lakh of your loan amount, then Home Equity = Current Value of the Property (Rs. 20 lakh) – Loan Payable (Rs. 1 lakh) = Rs. 19 lakhIf, due to some reason, there is a crisis in the real estate market, the value of your house may decrease, which will end up decreasing your home equity.

A home loan equity operates in the same way as a regular mortgage or home loan. The house is used as collateral in both situations. The only difference is that the eligible loan amount for a mortgage is up to 90% of the house's market value, whereas a home equity loan allows you to turn the equity on your home into cash. The repayment amount includes both the principal and the interest.If you ever find yourself in a financial crunch, consider averting it with a home equity loan. Be cautious of the risks it comes with, and you will smoothly sail out of your predicament.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.