Home Equity Loans - A Complete Guide

An Emergency can come knocking on your door at any point in time. While you may have access to an emergency fund, it may not always be enough.

You may have to consider alternative methods of getting funds which is not an easy undertaking. Friends and family can of course help but everyone has their limitations. You may have fixed deposits or investments in mutual funds and shares. However, it is not a quick process to liquidate these assets overnight.

That said, there are other avenues to get financing if you are a property owner. You can consider taking a home equity loan.

If you need funds instantly, home equity loans can be a useful way to get them.

What Is a Home Equity Loan?

The difference between the value of your home and what you still owe to the lender on the mortgage is the equity of your home. Your equity increases with every mortgage payment. The value can grow faster if the general real estate value where your property is located increases over time.

When in need of a lump sum payout, you can depend on a home equity loan to provide you with cash in hand. The way it works is that you tap into the equity in a home that you own and obtain funds when your assets are tied up in your property.

In other words, the portion of property you own, or the share of your property that you own acts as collateral against the funds that you borrow.

Most importantly, home equity loan interest rates are far more economical compared to other forms of consumer loans. However, the interest rate is fixed, and the loan will be granted only if you have adequate equity in the home available to you for the mortgage.

Please note that at Grihashakti, we only provide (to eligible applicants) loans against property that is free of all claims/mortgages and is 100% owned by the applicant. This article is for your information only. To know more about home equity line of credit, continue reading.

What is a Home Equity Line of Credit or HELOC?

Those who are not sure of the exact amount of funds required may opt for home equity lines of credit instead. Also referred to as HELOC, the home equity line of credit provides the borrower with access to a credit line and not a single lump sum payout like a home equity loan.

The HELOC allows the borrower to withdraw funds as per requirement up to the maximum capped amount as and when there is a financial need to fulfil. The borrower can pay off the first withdrawal before making another one.

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Therefore, with a HELOC there is no fixed repayment timeline. You can use and pay as you go, very similar to how a credit card works.

There is another point of difference between HELOC and home equity loan rates. Whilst the rate of interest is fixed for a home equity loan, it becomes adjustable in the case of the home equity line of credit. The rate of interest, even though discounted, is variable and can rise and fall making the HELOC quite unpredictable. In a number of cases, lenders offer an introductory 12-month economical rate of interest which can increase post the completion of this period.

That said, a line of credit is best suited for self-employed individuals and business owners who do not wish to be laden with a huge loan amount with a fixed repayment period. Before you apply for a home equity line of credit, be sure to check the heloc loan requirements including eligibility criteria with your lending partner.

How Is Home Equity Calculated & How Does it Work?

The home equity value can be calculated by taking into account the current market value of the property and deducting the total amount of debts that are registered against it. This will include the primary mortgage with your home loan partner.

Let’s understand how this works with an example.

For instance, the market value of your property is Rs. 25,00,000 and you still owe your home loan partner Rs. 15,00,000 as mortgage. All you need to do is to calculate the difference between the two. In this instance, the value is Rs. 10,00,000. This is equivalent to the value of your home equity.

When you apply for a home equity loan, the lender will determine the maximum loan amount basis the Rs. 10 lakh value. The lender may sanction an amount upto INR 10 lakhs depending on their policy and your eligibility.

How To Use Home Equity Loan?

The home equity loan acts as a second mortgage. That said, the best part about a home equity loan is that the funds can be used for any purpose. It is a lump sum single payout that can be used to meet emergency medical needs or perhaps a home remodelling project.

Just like any consumer loan, you will have to repay it back to the lender in fixed monthly installments. The repayment amount will remain fixed through the payback tenure. This will include both the principal and interest components.

You have the option to choose your repayment tenure. If you wish to be debt free faster, you may opt for a short repayment tenure where your monthly EMIs may be higher.

What are the Pros and Cons of Home Equity Loans?

It is always prudent to be aware of the pros and cons of any loan product before you avail of it. It is also important to take into consideration your current and expected financial condition and understand if you are in a position to repay the loan back to the lender.

Let’s look at the advantages first:

• Home equity loan requirements are flexible and easy to qualify for compared to other consumer finance like personal or business loans.
• The rate of interest is fixed which means you make a fixed monthly payout for the duration of the repayment tenure ensuring that your income, expenses and budget are under your control.
• The interest rates on home equity loans are much lower compared to a business or personal loans.
• The home equity loan comes with long repayment tenures that make it light on your pocket.
• The borrower receives a single lump sum payout and can use the funds for any purpose.

Here are the common disadvantages of taking out a home equity loan.

• You will get a much lower loan amount, at a much higher interest rate.
• Many lenders in India including SMFG Grihashakti do not offer this product, especially to individuals.
• The eligibility criteria for such loans are extremely stringent. One may need to show an excellent record of income, investments as well as creditworthiness before being even considered for such a facility.
• You will be taking on more debt as the home equity loan acts as a second mortgage on your property which is in addition to the payout on your existing home loan.
• There exists a higher risk of defaulting with two simultaneous loans which means you may lose your home.
• If you sell your property, you will be liable to pay off the entire balance of the home equity loan along with the remaining amount on the home loan as soon as you close the sale.
• You will be liable to pay any closing costs on the home equity loan, unlike other consumer loans.

Is A Home Equity Loan Right for You?

A home equity loan may be right for you if you are absolutely confident about being able to juggle two mortgage payments at the same time. Do remember that these loans come with reasonably long repayment durations and therefore, you need to budget your expense outlays accordingly to avoid any default. Loan Against property is a much safer and a better product than home equity loan, especially for individuals who have a lower risk appetite and limited income sources.

To learn more about loan against property, feel free to speak to an expert from the SMFG Grihashakti team. Call on our toll free number 1800 102 1003 or email us at [email protected] to schedule an appointment.