Home equity loan guidelines
If you’ve been paying off your mortgage for a while, you’ll start to build up some equity, especially if the housing market in your area sees property values rise. You might be wondering how to access that equity, whether it’s to pay off debt, finance home renovations, or take your family on vacation.
Equity – the difference between the value of your property and the loan amount – can be viewed if necessary for a financial reason. And can be done through a home equity loan.
However, home equity loans are not a one-size-fits-all financing option. Let’s explore some of the basic guidelines so that you can deepen your understanding of home equity loans.
All about home equity loans
What to know about home equity loans
Home equity loans are where a borrower uses the equity in their property as collateral to borrow money.
Homeowners can access their home equity in three main ways through a home equity loan:
- Credit line – Like a credit card, you receive a pre-approved credit limit and can use whatever funds you need. CBA, ANZ and Westpac offer home equity line of credit products. You pay interest on the funds you borrow.
- Lump sum – Like a personal loan, you may be able to use your own funds as collateral to borrow a sum of money to repay with interest.
- Reverse mortgage – Available for retirees, generally for those who own their property. This option is typically used to help fund retirement costs. You can access a portion of your property’s value, either as ongoing income or as a lump sum. This amount is reimbursed at the borrower’s choice, including when the house is sold, if he moves to a retirement home or if he dies.
Some homeowners may choose to access the equity in their mortgage by refinancing and increasing the value of their loan. It’s different from a home equity loan, but it’s still an option homeowners can consider in their research.
When can you use a home equity loan?
You may be able to apply for a home equity loan when you have enough equity to use, typically when the property’s value has increased and / or if you have put equity into the loan over several years.
You might be wondering if there is anything you can use a home equity loan for, that is, if the purpose of the loan is important to the bank. There are various reasons a borrower may want to take out a home equity loan, including buying a new property, consolidating debt, traveling, medical bills, or doing home renovations to further increase the value. net of property.
A lender cannot investigate the purpose of the home equity loan against the strict eligibility associated with personal loans and auto loans. But it can depend on the lender, so keep this in mindHow Much Equity Can You Access?
The amount of equity a homeowner can access can depend on their personal financial situation and is determined by the lender. The lender can assess your income, living expenses, and debts to determine the pre-approved amount for which you may be eligible.
The lender may also need to perform an appraisal of your property to internally assess your capital levels. A property appraisal can take several days, so if you are in dire need of funds, keep that in mind.
How to increase your equity?
There are several ways homeowners can increase their equity before applying for a home equity loan. This can help increase the amount of funds they are allowed to access, whether through a line of credit or a lump sum.
Increasing the equity in your property can be done by:
- Renovation and upgrade of the interior and / or exterior of the property.
- Reduce the loan balance by making additional repayments.
- Use an offset account to reduce the amount of interest charged on the loan and in turn decrease the overall loan balance.
What are the risks of a home loan?
There are some potential risks that homeowners should consider before applying for a home equity loan. While access to funds when needed, whether it’s for a renovation or a family vacation, may seem ideal, it’s also important to weigh the downsides.
First, by reducing your equity, your mortgage repayments can also increase. This is usually due to the fact that you have withdrawn the amount you put into the loan, which increases the balance owed.
Additionally, in terms of home equity loan terms, there is usually no set repayment term.[MOU1] . Thus, unlike a personal loan which you know can be repaid in 3 years for example, the home equity loan can be added to your loan balance and therefore repaid over the life of your loan. This can turn what could have been a 3-year fixed personal loan into thousands of dollars in additional interest charged on a higher mortgage balance for many years.
Finally, if for some reason you find that you can no longer pay off those new home equity loan payments, you risk losing the property. As with any financial product, incurring debt that you cannot repay can result in loan default. Not only can the property be foreclosed on by the bank, it will hurt your credit history and your credit score.
What are the alternatives to home equity loans?
Not sure if a home equity loan is right for you or just want to consider all of your options? You can consider the following:
- Personal loan – While a personal loan interest rates may be higher on average than current mortgage rates, they offer much shorter loan terms. This means you could end up paying less interest over time on top of the funds you’re looking to access.
- Credit card – Depending on the amount of money you are looking for, it may be worth considering a low rate or Interest-free credit card as an alternative. You will only have access to what has been approved as a credit limit, but if you can pay off your balance in full by the next statement period, you will avoid interest charges altogether. Keep in mind that it’s very easy to earn interest on a credit card if it’s poorly managed, as the average card rate has been around 16% for many years.