A home equity loan, also known as a term loan, a second mortgage, or equity loan. The equity on the house is used as collateral in attaining a home equity loan. The installments on these loans are payable monthly on top of the monthly installment one already pays towards their existing home loan, therefore the term ‘second mortgage’.
For example, let us say that Mr. X purchases a house worth Rs.1 crore. He avails a loan of Rs.80 lakh and makes a down payment towards the house of Rs.20 lakh. Initially, on the day that the house is purchased, the equity of the house is equal to the down payment, i.e. Value of the house (Rs.1 crore) – the amount owed (Rs.80 lakh) = equity (Rs.20 lakh).
Five years later, after loyally making the EMI payments [Use HOME LOAN EMI CALCULATOR to compute your Home Loan EMIs.] towards the loan, Mr. X now only owes Rs.65 lakh to the bank, while the value of the house has now risen to Rs.1.5 crore. In this case, the equity of the house is Rs.85 lakh: Value of the house (Rs.1.5 crore) – the amount owed (Rs.65 lakh) = equity (Rs.85 lakh).
6 Benefits Of Home Equity Loan
- Home equity loans are generally easier to attain as these loans are dispensed using your home as collateral. This loans are considered to be secured loans and are therefore easier to attain.
- This loans usually have low-interest rates when compared to unsecured loans. This helps an individual borrow money at an economical rate.
- These loans have a higher chance of being approved in case of a bad credit score.
- Attaining a home equity loan can help with tax deductions. However, it must be noted that not everybody is eligible for tax benefits.
- A large amount of money can be borrowed with home equity loans since your house itself stands as collateral.
- Since house equity loans are secured loans, they are, in a sense, safer for lenders as well. Therefore, lenders will be more inclined to approve these kinds of loans.