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When you take out a home loan, over time, a couple of good things start to happen. First, your repayments reduce the amount you owe (if you are paying both principal and interest). Secondly, your property may increase in value (subject to usual market variations, any improvements you make, and the intervention of global pandemics, etc. etc.).
As a result, you end up with “equity”, which is the difference between what your house is worth and what you owe. And with a special kind of loan, you can borrow against this equity for things like an investment property or home renovations. So, to learn how to tap into this resource which could be hiding in your home, read on.
As we previously mentioned, home equity is the difference between the amount you owe on your mortgage and how much your home is worth. For example, if your home is worth $500,000 in today's market and you owe $200,000 on your mortgage, you’d have approximately $300,000 in home equity you may be able to borrow against. To get an accurate idea of your equity, you may need to get your property professionally valued.
In finance-speak, a home equity loan is the general term used to describe any type of loan that allows you to borrow against the equity in your property. These can include line of credit loans, home loan top-ups, renovation loans, or seniors equity loans. You may also have the option of refinancing your existing home loan to access funds. So as you can see, there are lots of choices when it comes to leveraging your home’s equity.
So why would you want to take out a home equity loan rather than another type of loan? Simple. A home equity loan has the huge benefit that home loan interest rates are generally lower than other types of credit. Plus, the funds can be used for just about anything. This means a home equity loan can potentially help you save money, for example, if you're looking to buy a car or pay out other types of debts. Popular uses of home equity loans include:
Like we pointed out in the previous section, home loan interest rates are generally going to be lower than those associated with other types of credit products, like personal loans or credit cards. This is because the property you’re borrowing against provides the lender with a high level of security. Another advantage with a home equity loan is that you can usually use the funds for almost any potential purpose, providing you with huge flexibility.
While there are big advantages with a home equity loan, as with any type of financial product, there are a few things you should consider before taking one out. For example, you may want to watch out for:
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Last updated: 09/09/2021