A home equity loan, also known as term loan, a second mortgage, or equity loan, is an additional loan availed by an existing housing loan borrower. The borrower lends the additional amount to the existing HOME LOAN holder after considering the equity of his/her house. Equity, in the scenario, can be defined as the difference between the current value of the house and the total amount due towards the housing loan. The equity on the house is used as collateral in attaining a home equity loan. The instalments on these loans are payable monthly on top of the monthly instalment one already pays towards their existing home loan, therefore the term ‘second mortgage’.
For example, let us say that Mr. X purchases a house worth Rs.1 crore. He avails a loan of Rs.80 lakh and makes a down payment towards the house of Rs.20 lakh. Initially, on the day that the house is purchased, the equity of the house is equal to the down payment, i.e. Value of the house (Rs.1 crore) – the amount owed (Rs.80 lakh) = equity (Rs.20 lakh).
Five years later, after loyally making the EMI payments [Use HOME LOAN EMI CALCULATOR to compute your Home Loan EMIs.] towards the loan, Mr. X now only owes Rs.65 lakh to the bank, while the value of the house has now risen to Rs.1.5 crore. In this case, the equity of the house is Rs.85 lakh: Value of the house (Rs.1.5 crore) – the amount owed (Rs.65 lakh) = equity (Rs.85 lakh).
Applying for a loan
The rates on interest on home equity loans vary from place to place. One must therefore visit multiple lenders before finalizing. Upon request, the lender will go through their regular approval procedure like checking your credit score, etc. This may take a couple of days, and if approved, the money will be disbursed after a couple of weeks.
Upon approval of a home equity loan, an individual may choose to utilize the money in either of the two options mentioned below:
The repayment of the loan depends on the type of home equity loan you have opted for. For a lump sum equity loan, you will usually have to make monthly payments until the loan amount is settled. Whereas, for a line of credit of a HELOC, you are allowed to make small payments, at you convenience, for several years before having to make regular payments.
Home equity loans are disbursed by lenders after considering the equity of your house. Home equity, in simple terms, is the difference between the value of your home and the liabilities payable towards the home. The formula, therefore, is:
Equity = Current value of the house – the total loan payable towards the house
For example, if you have to purchase a house worth Rs.50 lakh and have taken a loan for Rs.40 lakh, the equity of your house will currently be Rs.10 lakh. Breaking it down, Value of the house (50,00,000) – Total loan payable (40,00,000) = Equity (10,000)
In a few years, let us assume that the value of the house has increased to Rs.75 lakh and you have paid off half of your loan. You are now left with only Rs.20lakh in loans while the value of the house has increased. Therefore, the equity of the house will also increase in this case. The equity of the house will now be:
Current value of the house (75,00,000) – Total loan payable (20,00,000) = Equity (55,00,000)
As showcased above, the equity of the house varies from time to time. In theory, the equity of a house can reduce as well. If the market for real estate drops drastically in a certain area, so will the value of a house in that locality. This will in turn adversely effect your house’s equity.
Home equity loans can be a boon to an individual considering the low interest rates and ease of attaining these types of loans. Lenders also have an easy time approving home equity loans as there is security associated with the loan. A borrower’s house itself acts as security in this case. These kinds of loans are known to be flexible in nature as well, and therefore there is less hassle in attaining a home equity loan.
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