Home equity loan or ‘second mortgage’ demystified

Find out how useful a home equity loan can be for you.

Home equity loan or ‘second mortgage’ demystified

Owning one’s dream house is on most people’s financial wish list. However, purchasing a home also involves a significantly high financial goal and commitment. You have to repay a home loan via EMIs to fulfil this dream. A considerable part of your income goes towards this. 

As a result, you may find it difficult to arrange funds for other goals such as your child’s higher education, house renovation, marriage, business contingencies, or other personal needs.

Did you know you can fulfil all the goals mentioned above by taking a home equity loan, also known as a term loan or second mortgage loan? Let’s look at it in detail.

Related: 5 reasons to go for home loan refinance

What is a home equity loan?

You can take an additional loan over your existing home loan, to fulfill your short-term goals. This added loan on your current home loan holding is provided on considering the ‘equity’ of your house.

Related: When is it a good idea to take a top up home loan? 

Demystifying Home Equity Loan

Therefore, in a home equity loan, you can use the equity of your house as collateral. Since you are already paying your home loan EMIs, the home equity loan instalments are payable on top of it as the ‘second mortgage’.

How does a home equity loan work? 

Let us understand this with the help of an example. Let’s assume you purchased a house worth Rs 1 crore. Let’s assume further that you made a down payment of Rs 20 lakh and availed of a loan worth Rs 80 lakh. 

Initially, the equity of your house was equal to the credit availed of. You then began repaying your loan through EMIs. Over a certain period of time, say five years, you owe Rs 65 lakh to the bank, whereas the market value of your property is Rs 1.5 crore. Now, the equity of your house is Rs 85 lakh. Therefore, you can get an additional loan, based on the market prevalent interest rates, by keeping the ownership as collateral.

Related: Home buyers to get equal rights as banks with new financial creditor status

What are the benefits of applying for a home equity loan?

The top five benefits of applying for a home equity loan are:

1. Easy availability: Since you are an existing borrower, you can easily get an additional loan. It is a secured loan, where you keep your house equity as collateral. Therefore, it is comparatively easier to get when compared to an unsecured loan.

2. Low interest rate: Secured loans have a lower interest rate as compared to unsecured credit. Therefore, you can avail of a home equity loan at attractive interest rates.

3. Quick approval: In the event of a bad credit score, you may find it challenging to get a personal loan approved. However, you might still get your home equity loan approved by your bank.

4. Tax benefits: You can get tax deductions on your home equity loan. However, you need to check your eligibility for these tax benefits.

5. Easy repayment: Since you are repaying the home equity loan along with your pre-existing home loan, it is a seamless process. You do not have to worry about paying two different loans.

Related: Smart ways to reduce your loan stress

Conclusion

A home equity loan is a convenient, economical, and quick way to get additional funds while repaying your home loan. It is easier to calculate, and a better option to fulfill your short-term financial goals. This makes it a boon for borrowers looking for affordable interest rates and easy availability.

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