How home equity loan works
A home equity loan is a type of loan that allows you to borrow money against the equity in your home. Equity is the difference between your home’s current market value and the outstanding balance on your mortgage.
For example, you may have a house worth £150,000 and an outstanding mortgage of £75,000. In this case, you have £75,000 of equity in your property. A home equity loan allows you to borrow some or all of the equity in your property in return for the lender taking your home as security for the loan.
Because the lender is taking a legal ‘charge’ over your home as security for the loan, home equity loans are often available at lower interest rates than other types of credit such as unsecured loans, overdrafts or credit cards.
You can use a home equity loan for almost any purpose. You can use it to consolidate other debts you have, undertake improvements on your property, or pay for a one-off item such as a new car or a dream holiday. In addition, you can use a secured loan to pay for a wedding or to help your children through university or college.
Of course, as the lender is taking your home as security for the homeowner loan your property will be at risk if you fail to keep up the repayments on your loan.
How does equity loan work
Depending on the amount of equity in your home and your income, you can typically borrow between £3,000 and over £100,000 on a home equity loan. You are likely to have to demonstrate that the loan is affordable to you and you will have to provide identification.
The interest rate you will be charged on your home equity loan will generally be determined by two factors. Firstly, it will depend on the amount of money you want to borrow in relation to your home’s value (the ‘loan to value’). Generally speaking, the higher the proportion of your home’s value you want to borrow, the higher the interest rate will be. Secondly, your credit rating is likely to affect the interest rate and you may pay a higher rate if you have a less-than-perfect credit history (for example if you have County Court Judgments (CCJs) or defaults on your credit file).
Here’s how a home equity loan typically works:
1. You apply for a loan:
You will need to provide documentation of your income, assets, and debts. You will also need to have your home appraised to determine its current market value.
[Image of Home equity loan application]
2. The lender approves your loan:
The lender will review your application and creditworthiness to determine if you are approved for a loan. If approved, you will be given a loan amount and interest rate.
3. You receive the loan proceeds:
The loan proceeds will be disbursed to you in a lump sum. You can use the money for a variety of purposes, such as home renovations, debt consolidation, or educational expenses.
4. You repay the loan:
You will make monthly payments to repay the loan. The interest rate on a home equity loan is typically fixed, which means that your monthly payments will remain the same over the life of the loan.
Here are some of the benefits of a home equity loan:
Lower interest rates:
Home equity loans typically have lower interest rates than other types of loans, such as personal loans or credit cards.
The interest paid on a home equity loan may be tax-deductible, which can help to reduce the overall cost of the loan.
Home equity loans can be used for a variety of purposes, making them a versatile financing option.
Here are some of the drawbacks of a home equity loan:
Risk of foreclosure:
If you are unable to repay your home equity loan, you could risk losing your home to foreclosure.
As you repay your home equity loan, you will be reducing the equity in your home.
There are closing costs associated with home equity loans, which can add to the overall cost of the loan.
Here are some things to consider before taking out a home equity loan:
How much equity do you have in your home? You will typically need to have at least 20% equity in your home to qualify for a home equity loan.
Your credit score:
Your credit score will affect the interest rate you qualify for. A higher credit score will typically result in a lower interest rate.
Your debt-to-income ratio:
Your debt-to-income ratio is the percentage of your gross monthly income that goes towards debt payments. Lenders will typically consider your debt-to-income ratio when determining your eligibility for a loan.
Your financial goals:
What do you plan to use the money for? Home equity loans can be a good option for financing large expenses, such as home renovations or debt consolidation. However, they are not a good option for financing everyday expenses.
If you are considering taking out a home equity loan, it is important to shop around for the best interest rate and terms. You should also make sure that you understand the risks involved before taking out the loan.
The application process for a home equity loan is straightforward and you can generally expect to receive the money within 4-6 weeks.
To access the money tied in your home equity and get a great loan rate, book an appointment with the Mortgage Genie.