As a homeowner, you have probably heard a lot of talk about ‘home equity’ but aren’t quite sure what it means. It is actually quite simple: Equity is the difference between your property’s appraised value and the outstanding amount left to pay on your mortgage. For example, if you still owe $200,000 on a home worth $380,000, your equity is $180,000. You build equity by making a down payment and principal payments on your home loan.

What Is A Home Equity Loan?

You have two options; a standard home equity loan and a Home Equity Line Of Credit (HELOC); here is a quick overview of both.

Standard Home Equity Loan

This loan provides you with a lump-sum payment which you repay over a pre-agreed period. You can choose between a fixed or adjustable rate loan and a repayment period of up to 30 years. It is generally a straightforward process, and while you need to pay closing costs, they are lower than on a typical mortgage.

HELOC

This is a loan with a variable that works a bit like a credit card, and it occasionally comes with one. You are pre-approved for a specific spending limit, and you withdraw the money as and when you need it via special checks or an HELOC credit card. Your monthly payments will vary depending on how much you borrow and the interest rate. There is a set term on an HELOC loan, and when this date is reached, you must repay the outstanding amount in full.

What Are The Benefits of a Home Equity Loan?

This form of loan has the potential to be a ‘win-win’ situation for borrower and lender. Borrowers benefit from the following:

• Low-Interest Rates: While the rate is higher than on a mortgage, it is much lower than the interest on credit cards or personal loans. If you need a specific sum of money, a home equity loan is a far better option.
• Easier Approval: As you already have equity, it is much easier to receive approval; even if you have a poor credit rating.
• Large Sums Available: You could qualify for a substantial sum of money depending on how much equity you have in the home.
• Tax Benefits: While not every homeowner qualifies, there is a possibility that the interest costs on the loan are tax deductible.

One of the main reasons why the above benefits are available is because the low level of risk taken on by lenders. From a lender’s perspective, a home equity loan is a much better investment than unsecured debt. If a borrower defaults, the lender retains all the money from the mortgage, all the cash paid during the home equity loan term and can then repossess the property.

Things to Consider

If you want a smaller amount, choose an HELOC and borrow what you need.

You need to have enough equity in your home to borrow the entire amount. For example, if you only need $7,000 and take out an HELOC with $25,000, you’ll require a minimum of $25,000 in home equity.

It is best only to take out a home equity loan when you really need it. It is not a sensible way to splash out on luxury items. Responsible homeowners tend to utilize it for paying college fees and renovations that add to the property’s value. Make sure you conduct a detailed check of your financial health before borrowing money against your home. Above all, make sure you can easily repay the monthly amount without compromising your ability to pay other bills.

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