Mortgage Tips

An owner’s home equity is the difference between a home’s fair market value and the total outstanding of all mortgages due on the property. The home equity of the owner increases as more payments are made towards the mortgage and also with the appreciation of the property in the market. Home equity loans are secured loans that a borrower can take against his home equity.

Why take a home equity loan

A home equity loan can be used for any purpose. You can settle a debt on a credit card, use it to renovate your home, buy a new car or even pay for college fees using this lower interest rate loan.

For example, credit card debts are unsecured debts, and come with high interest rates and hidden charges. A home equity loan on the other hand is a secured debt against a portion of the value of your home. Since it is secured, the rate of interest is significantly lower than the unsecured credit card line of credit. It is because of this reason why many people choose to consolidate their credit card debts and pay them off using a home equity loan.

If you want to increase the value of your home, renovating is a good way to do so. If you are contemplating taking a personal loan for this, it might be an expensive proposition as personal loans are generally unsecured loans. Lenders charge higher interest on these to counter the risk involved. You can actually end up paying anywhere between 15% and 25% as interest on the principal amount of such loans. On the other hand, home equity loans will be much cheaper and provide a good financing solution for home improvement.

How to get a home equity loan

Home equity loans are available for both short and long term. As a borrower, you can choose the term of the loan according to your need.

Like all other loans, you will need a reasonably good credit score to avail a home equity loan. If you have a poor credit history, you can still opt for a home equity loan, but you are likely to get a less attractive rate. If you have more than two mortgages pending on your home, your home equity is likely to be less and in such a case, you will be able to borrow a smaller sum of money. The lending institution may also charge a slightly higher interest rate and try to recover payments within a shorter maturity period.

If you have decided to take a home equity loan, it is best to contact your current lender, as they are likely to give you a good deal. The process of applying for one will be easy. You will need the property documents, your income statements and documentation of other loans or mortgages on your property. Once the approval process is through, you will receive a lump sum, which you will need to repay in monthly installments. For convenience, you can set up a request for automatic withdrawal to make the monthly payments on time and avoid the risk of defaulting.