What is a Home Equity Loan?

A home equity loan is a type of financial tool in which a homeowner borrows against the equity in their home. Simply put, a home equity loan is your home’s current value minus what you still owe on your mortgage. If you come up with a positive number upon calculating the two values, you have equity.

A formula that would help you determine your home equity looks like this:

Home’s Current Value - Loan Balance = Home Equity

For example, if you have purchased a home worth INR 70 lakh and have taken a mortgage loan worth INR 20 lakh, then the current equity of your home will be 50 lakh.

70 Lakh (Current Value) - 20 Lakh (Loan Balance) = 50 Lakh (Home Equity)

After a few years, let us assume that the value of your home has increased to INR 80 lakh, and you have paid off half of the mortgage loan. The current home equity will be as follows:

80 Lakh (Current Value) - 10 Lakh (Loan Balance) = 70 Lakh (Home Equity)

In essence, home improvement can significantly increase your home equity, making you eligible for a better loan value. When you improve your home, you enhance its appeal, efficiency, and value, which can make it more valuable in the real estate market. For example, adding a new bathroom or kitchen, or upgrading your home's energy efficiency, can increase its value and therefore your equity.

Home Equity Loan Interest Rates

Interest rates are an important aspect of home equity loans as they directly affect the overall cost of borrowing. Compared to other types of loans associated with unsecured loans, interest rates levied on home equity loans are lower. For instance, a typical home equity loan might have an interest rate of [5% to 8%]. However, several aspects impact interest rates on home equity loans. These include:

Credit Score

To approve a home equity loan, lenders assess the borrower’s creditworthiness through their current credit score. A higher credit score means higher home equity loan value and lower interest rates, reflecting a lower risk for the lender.

Loan-to-Value Ratio (LTV)

The loan-to-value ratio (LTV) is a measure of the loan amount compared to the appraised value of the property. A lower LTV, which means you have more equity in your home, results in less risk for the lender, often leading to favourable home equity loan interest rates.

Economic Conditions

Broader economic trends, such as Federal Reserve policies and inflation, influence interest rates levied on home equity loans. For example, during periods of lower interest rates, homeowners are likely to secure better terms.

Loan Amount and Term

The amount borrowed and the loan duration term can also affect the interest rates. Higher loan amounts and shorter repayment periods might come with different interest rates. Check with your home equity loan lender for more information.

Home Equity Loan Lenders

Choosing the right lender is a crucial step before you apply for a home equity loan. Different lenders offer home equity loans, each with its own set of advantages and disadvantages. Some of the most common lenders include:

Banks

Traditional banks are among the most common sources of home equity loans. They offer competitive rates, especially for customers with good credit histories and banking relationships.

Credit Unions

Member-owned credit unions are other trusted lenders that often provide lower interest rates and fees than banks. The membership criteria must be met, but the benefits of home equity loans can be significant.

Online Lenders

The emergence of FinTech companies has introduced plenty of online lenders into the financial services market. They promise to offer fast approval processes and competitive rates, though it is always advisable to verify their reputation.

Mortgage Companies

Some companies specialise in home loans, including home equity loans. When it comes to home equity loans vs home loans, these companies might offer specialised services and competitive rates.

Home Equity Loan Process

Applying for a home equity loan is a straightforward process, especially if you keep all the necessary information and documents at hand. The process involves:

Assessing Your Equity

Start by calculating your home's equity. This involves determining the home’s current market value minus the outstanding mortgage balance. Most lenders allow borrowers to borrow up to 85% of the home’s equity.

Check Your Credit Score

Your credit score will significantly impact your home equity loan’s interest rate and approval prospects. Check your credit report online, obtain a copy, review it for errors, and take steps to improve your credit score to get a good loan-to-value amount.

Gather Documentations

Borrowers need to gather several essential documents, such as proof of income, details of the existing mortgage, and information about the home’s value (appraisal reports, for example).

Compare

Next, compare rates, terms and fees from various lenders to ensure you obtain the benefits of home equity loans. Use online tools and calculators to estimate total loan costs and monthly payments.

Submit Your Application

Once you have selected a lender, complete the home equity loan requirements carefully and double-check all the information you provided. This can usually be done online, on your phone or in person. Provide all the necessary information promptly to avoid delays.

Underwriting and Approval

Once you submit your application, the lender will review the information, verify your creditworthiness and assess your home’s value during the underwriting process. This stage can take anywhere from a few days to several weeks. The lender may request additional information or documentation to transfer the funds to your respective bank account.

In conclusion, home equity loans offer homeowners a practical solution for leveraging the value of their home to achieve various financial goals. Hence, whether looking to buy plots for sale in Tambaram or other areas of your choice, understanding what a home equity loan means, the intricacies of interest rates, selecting the right lender, and navigating the application process are some of the crucial steps in making a sound decision and meeting their various financial needs.