Real estate is an asset that almost always becomes more valuable with time. Apart from being just an accommodation, the property one owns is also an excellent tool for making intelligent financial decisions. Even if the owner has taken an online Home Loan for the property, it increases in value with each EMI payment. The appreciated value, called home equity, belongs to the owner, not the finance company. Homeowners can use that equity to meet their immediate cash requirements. Here’s everything one needs to know about Home Equity loans and tips and tricks to improve home equity.
What is a Home Equity Loan?
Before understanding what a Home Equity Loan is, one must first know what home equity is. Simply put, it is the difference between the property’s current market rate and what the owner owes on the mortgage. It is like a second mortgage since the borrower uses an already mortgaged property as collateral to get another loan. Several lending institutions offer Home Equity Loans secured against the home equity. Many homeowners borrow these loans to meet their big-ticket expenses, like education, debt consolidation, home renovation, etc.
Types of Home Equity Loans
Homeowners can borrow two types of loans against the equity in their house:
1. Fixed-Rate Equity Home Loans
These loans are ideal for borrowers who need to pay for a big-ticket expense in a lump sum. They can borrow a loan against their home equity, cover the cost, and repay the loan to the provider through regular EMI payments. They cover both interest and the principal amount spread across the loan term. As its name suggests, this type of Home Equity Loan has fixed interest rates for the whole loan period. Usually, their interest rates are higher than traditional Home Loans.
2. Home Equity Line of Credit
Also known as HELOC, it is a revolving line of credit similar to credit cards. Rather than providing a lump sum amount in a single instalment, the borrowers get a line of credit that they can withdraw whenever they need money. The loan amount depends on the available home equity, and the draw period may range from 5 to 25 years.
Once approved, the borrower can withdraw only the amount they need from the available credit limit and pay interest only on that amount. They do not need to pay any interest rate if they do not draw anything. Unlike fixed-rate loans, interest rates for HELOC are variable, based on daily calculations and the public index. The borrower pays the interest only during the draw period. After that, they can start repaying the entire amount in monthly EMIs.
Home Equity Line of Credit is an excellent funding option for those who have an ongoing project and want money in instalments. They also get extra time to repay their existing debt.
Tips and Tricks to Improve Home Equity
Home equity keeps fluctuating based on the local real estate market. Still, here are a few tips and tricks that help build equity on a personal level:
- Pay Off the Mortgage Quickly: Try to repay the Home Loan faster. The faster the repayment, the more equity will build up in less time. Use an EMI calculator for LAP to opt for the shortest possible loan tenure with easily affordable EMIs. Moreover, use tax returns, bonuses, and extra funds to make part prepayments whenever possible to repay the loan faster.
- Make a Bigger Down Payment: The down payment one makes while taking a Home Loan adds to the equity. Although loan companies fund up to 90% of the property’s price with a housing loan, borrowers must do their best to pay a higher down payment and borrow less. Besides reducing the loan burden, a bigger down payment adds to the home equity and increases the Home Equity Loan amount when required.
- Increase the Property’s Value: Renovate the bathrooms, upgrade the kitchen, add extra rooms and balconies, change the flooring, and take extra steps to increase the property’s market value. A bigger home with additional amenities will have a higher home equity than a basic structure.
A Home Equity Loan allows homeowners to use the property’s home equity value that would have remained idle otherwise. Take advantage of your home’s increased market value and use it to fulfil your family’s urgent financial needs. While looking for an online Home Loan to purchase a house, save more for a bigger down payment and get your dream house hassle-free. When required, use a Home Equity Loan to cover the expenses without disturbing your budget.
