An equity loan is an option for homeowners who need to access funds for a particular purpose, such as a home renovation, an investment property purchase, or debt consolidation.
But what is an equity loan and how does it work exactly? Here, your trusted mortgage broker shares what you need to know about home equity and how you can use it:
What Home Equity Is
Home equity is the value of your home minus what you owe on it. If you have a mortgage, your home equity is equal to your home’s value minus the balance owed on your mortgage.
But what if your mortgage is paid off and your home is worth $600,000, but you owe $200,000 on it? Then your home equity is worth $400,000.
If you want to use this home equity to access money, you can take a loan against it. The loan is usually a line of credit, but it could also be a second mortgage.
How Equity Can Be Used
Many people use home equity loans to pay down debt or take out a second mortgage. You can also use the money to:
- Buy a new car
- Pay off credit cards
- Pay medical bills
- Start a business
Thanks to home equity loans, homeowners have the ability to unlock their home’s true value.
Having a home equity loan is beneficial because it is not subject to the same credit standards that normal loans are. This is why it is easier to qualify for home equity.
You can use home equity loans to accomplish any financial goal, but you should be cautious about what you use them for.
How to Build Equity in Your Home
There are two primary ways to build home equity:
Reduce Debt
One of the most effective ways to build home equity is to reduce debt. Paying down a mortgage or car loan makes it easier to access your home’s equity.
Increase Your Home's Value
The other way to build home equity is to make your home more valuable. This can be done by remodelling and making upgrades.
If you are considering renovations, it is important to keep in mind how much value they might actually add to your property, and how much the process will cost. A property valuer may be able to advise you on how much value a proposed renovation project might actually add to your property, and whether it is worth you making the investment.
Potential Drawbacks of Equity Loans
Approval Is Not Always Guaranteed
Although you may be able to get a home equity loan, not all lenders will approve you.
Some lenders may have a minimum amount of equity that you must have in your home to qualify or may require you to have a certain amount of equity already.
If you have bad credit or have not maintained a good payment history with your mortgage company, chances are good that a lender will not approve you for a home equity loan.
You Have an Additional Debt
You may have a great deal of home equity, but that does not mean that you want to borrow more against your home. Borrowing more against your home can increase the amount of interest you are paying and the risk that you are taking on in the event of a downturn in the economy.
Even if your home equity is increasing, you may not want to risk it by taking out a loan.
You're Taking on More Financial Risk
If you are already taking on a mortgage, then taking out another loan against your home equity is like taking on more financial risk.
Conclusion
Equity loans are a great way to help homeowners pursue their financial goals. The ability to use your home's equity to access cash is a huge benefit to homeowners.
However, you should be careful if you are thinking about taking out a home equity loan. The interest rates on these loans can be high and you could lose your home in the event that you are unable to make payments. Before you make a decision, it’s a good idea to speak with a trusted mortgage broker in your area who can discuss the pros and cons of getting an equity loan in detail.
Wealthy You is an established mortgage broker in Sydney that has been providing tailored mortgage solutions to clients for almost a decade. Let our lending specialists help you today. Get in touch with us to know more about our solutions!
