Home Equity Loan
Home equity loans are a useful tool for many home buyers. Home equity loans are also called line of credit mortgages. You will see the terms used interchangeably by many lenders.
Home equity loans have a myriad of uses and can be used very effectively to repay a loan very fast. Depending on their structure and lender they can be used as an effective overdraft or have a reducing balance. In this article we’ll look at the features of a home equity loan and discuss the benefits and drawbacks.
What are they and how do they work
A home equity loan at its essence is one where you have more than 20% equity in your property. If you have less than 20% equity in your property there is little to no chance of obtaining a home equity loan. As an example, if you have a property worth $500,000 you will need to have less than $400,000 worth of lending to qualify for a home equity loan. So if for example you have $350,000 worth of lending you may qualify for a home equity loan of $50,000.
A home equity loan is essentially a revolving line of credit secured on your property. They are used in many different ways – we’ll discuss this during the article.
There is nothing stopping you from having a home equity loan as part of a loan package and it may only make up a small proportion of your lending portfolio. Many borrowers have a home equity loan as part of their portfolio, this is a very common lending position.
Your ability to borrow will be assessed as normal and you’ll need to demonstrate the ability to repay the loan. Your lender will take you through the process, but if you’ve been through this process before you should find little reason for the process to be different.
As with all credit applications your credit history will be checked, and assuming you’ve been repaying your current home loan on time as agreed there should be little difference and few reasons why you should not obtain finance. If you are taking out a revolving line of credit on a property you own outright then you’ll need to provide that property as security for the loan.
Your home equity loan will be structured in one of two different ways. Either it will be a revolving line of credit where the limit is set and you cannot go above. Alternatively your lender might suggest a reducing balance home equity loan which means your lending limit slowly reduces each month allowing you to build some equity in your property as each month goes by. The line of credit means your loan is essentially an interest only loan with no limit reductions meaning you’ll never actually develop any equity in your property., unless you pay down your loan.