Is an Equity Loan the Right One For You?
November 4, 2008
If you own property outright or own property on which you have been making regular payments, then it is quite likely that the value of this property has risen significantly since you first made the purchase. This is an affordable option when you need money for home renovations or for any other purposes. You can even borrow money based on the equity in your home to take a long awaited holiday.
Equity is the difference between what you owe on the property and the value of that property on the real estate market. It is often referred to as a second mortgage on your home because it is, in effect, another mortgage with the home secured as collateral to the value of the equity or the amount of the loan if you do not borrow to the full value.
The terms of equity loans vary among the many lenders willing to approve this type of loan for homeowners. Some lenders will approve loans for about 80% of the equity while others will approve loans of 125% of the equity. This depends on your ability to repay and your credit history, but lenders know that once you complete all the renovations, the value of your home will have increased even more.
You can have a variety of repayment terms for your equity loan as well. In some cases, you may only have to pay the interest on the loan for the first number of years and then start regular payments that include the interest and a payment on the outstanding balance. These lenders give you breaks on your repayment which allows you to have money available to purchase new furnishings for the home when your renovations are completed. It also gives you time to get your finances in order during the deferred period. You can also choose the length of term you want to repayment, which could be from 5 to 40 years depending on the amount you borrow.
If you want to have all financing on your home repaid at the same time, you can choose a term that matches the final payment date of your existing mortgage.
You don’t have to take out an equity loan with the lender than holds your current mortgage. It is important for you to search online for lenders to find one that offers you the best terms in the way of low interest rates and low monthly payments. Another plus with taking out an equity loan in the UK is that the first £100,000 of this loan is tax deductible, whether or not you use the money to make renovations or additions to your home.
You have two options in an equity loan. One is the traditional form of loan in which you receive all the money at the same time and then start making payments on it. The advantage of this is that you the money you need to pay for everything from start to finish, but if the work takes a little longer than you think, you may be tempted to dip into the pot and use the money for other purposes. You can only get one equity loan on the same piece of property, so once you have this loan repaid, you cannot take out another loan of the same nature, even if you have your mortgage paid off in full.
If you want to be able to use and reuse the money from the equity in your home, another type of equity loan is a line of credit. The lender approves you for an amount of money, but you do not receive the funds in the form of a cheque for the full amount. Instead you have access to the money in the form of cheques and a debit card. You make a payment each month based on your outstanding balance and the interest is also calculated on this balance. When you repay the money, you still have access to it to use for whatever purpose you wish.
The process of getting an equity loan is very similar to that of obtaining a mortgage. The lender will require an appraisal of the property to determine its value, which in turn determines how much money you are able to borrow. You must acquire the services of a solicitor to handle the legal documents and you definitely must have insurance on the property. Without these in place, you will not find a lender willing to give you a loan.
When you want to have a larger or more modern home, with an equity loan you won’t have the hassle of trying to sell your home or looking at other properties that are for sale. There is no need to move from your neighbourhood where you have been living for years and have to try to make friends with new neighbours.
Written by Peter · Filed Under Loans
I would have thought that a lot of people would have been struggling with the amount of equity in their home at the minute. The number of people that have purchased property in the last 5 years is really high that would mean that the majority of the population are now struggle with equity in their home. I believe that some people will have made money and achieved enough equity but still they won’t get 125% of the value of their home I would imagine they would struggle to get 90% of the homes value as banks are being really cautious with their money as they need to make money to repay their debt to the government.