subject: What You Need to Know About Home Equity Loans [print this page] If you have to pay for some important and large expenses or you want to get rid of high interest debt, you can secure finance against your equity in your home. Home equity loans can support you during a financial crisis and help you tide over the situation at least temporarily. Your equity in your home is calculated by deducting your outstanding debt on the property (usually the amount remaining on your first mortgage) from the market value of your home, and you can typically avail a loan of up to 80% of the value of this equity. Various financial institutions extend loans against equity at competitive terms.
Background checking
After you meet the officials in a bank or any other financial institution with your request for a loan against equity, they will conduct a background check to evaluate your risk profile as a borrower. They will look at your monthly income, existing debts, the value of your home, your credit history etc. Depending on these factors, they will decide the credit limit and the applicable interest rate for you. This credit can be issued as a lump sum or as a line of credit. In both these cases, you have to repay the loan in monthly installments over a predetermined period of time.
Which one to choose
Whether you should choose lump sum home equity loans (HEL) or go for a HELOC should be determined by the nature of your financial need. If your need is intermittent and unpredictable, you should go for a HELOC. But when you want a large sum of money for situations like renovation of your home, purchasing a new car, or even buying another property, you should go for an HEL.
Fixed and variable rates
You can avail these loans at a fixed or variable rate of interest. A fixed rate remains unchanged throughout the whole term of the loan. You have to keep making the same amount of payment each month until the end of the term. On the other hand, a variable rate can change several times during the term of your loan, depending on changes in benchmark interest rates.
Advantages of loans taking against equity
Compared to unsecured loans, both HEL and HELOC carry a rate of interest that is significantly lower because your house is used as collateral. However, the interest rates on these loans are higher than the rates on a first mortgage. Both these loans offer tax deduction on the interest that you pay. This is an important advantage, which you do not get in most other kinds of loans.
Home equity loans are a great option when you need large funds either in a lump sum form or on an ongoing basis and you have substantial equity built up in your home. However, as they put your home at risk, you should use the funds judiciously. Make sure that you can afford the monthly payments so that there is no risk of foreclosure.
