What Is a Home Equity Loan?
Home equity loan is a loan that you get against the equity in your home. In other words, it is al loan in which your home is kept as collateral. Home loan in this sense is similar to a second mortgage. As in the case of second mortgage, the ownership of the property is affected till you are able to pay off the loan.
You can calculate the value of the home equity by subtracting the current value of the house and the mortgage. To explain this with an example, let us consider that the current value of your home is £250, 000 and the mortgage amount is £150, 000. So if you take a loan against your property, you will be left with an ownership worth £100, 000 of your home. Keep in mind that there are some lenders who may also look at other factors such as your loan repayment ability etc. before extending you the loan.
Types of Home Equity Loans
Home equity loans in the UK can be classified as:
- Standard home equity loans
- Home equity line of credit (HELOC)
- Home equity loan hybrid
Standard home equity loans: These loans are also known as terms loans, second mortgage installments or closed-end loans. You are lent the money as a lump sum for a specified period of time. The loan is beneficial if you have a large financial requirement to meet.
Home equity line of credit: As per this option, you can access the loan in installments. There is a fixed limit to the amount you can borrow against your home. The loan works similar to a credit card---- you pay interest on the amount you spend and not on the actual limit of your credit card. The more you borrow, the more you would have to pay.
Home equity loan hybrid: Over the period of time, the line between fixed rate and variable rate loans has gradually blurred and the home equity loan hybrid is a good example of this. Here, the loan starts off as a fixed interest loan for a certain period of time, say two years, five years or seven years. After that it is converted into a variable interest loan.
Before deciding on the type of loan you require, it is better you do some research on the prevalent interest rates under each scheme. Compare different lender rates and schemes as also the repayment options they are offering before coming to a decision.
