As most of the world is experiencing a financial downturn, it ultimately trickles down to individuals. This means that many individuals are experiencing financial difficulties, which sometimes warrant the need for loans and other financial aid.
Real estate owners have an advantage when it comes to borrowing money because home equity loans are more affordable and come with better terms and conditions. Additionally, these credits are easier for homeowners to access than those who don’t have anything of value to put down as collateral. This financial leverage can be particularly beneficial in the wholesale real estate market, where quick access to funds can facilitate swift property transactions and capitalize on emerging opportunities.
Seeing as the value of real estate is on the increase in most regions, most homeowners now leverage their property to access funds at favourable rates and terms. In this article, we will discuss the concept of these types of credits, their benefits and all that you need to know to make an informed decision so stay with us.
Understanding Home Equity
If you buy a home on a mortgage, the lender has part ownership of the home until the mortgage is paid off. Home equity, therefore, means the percentage of the current value of the home that the owner holds at any point in time.
Initial equity in a property is obtained when the buyer makes a down payment on the property at the point of purchase. Subsequently, the equity grows as the person makes payments on their mortgage. The reason for this growth is that the outstanding principal reduces with each installment paid.
So in summary, home equity is defined as the difference between the value of a property and what is owed as a mortgage. So if you want to know your home equity, you have to find out the market value of the house and your mortgage balance. Let’s take this example:
Value of your property = NOK 2,000,000
Loan Balance = NOK 1,500,000
Home Equity = NOK 2,000,000 – NOK 1,500,000 = NOK 500,000
You can visitwww.billigeforbrukslån.no/lån-med-sikkerhet for more details on home equity and how you can leverage it to get loans with great rates and terms.
Types of Loans Secured by Home Equity
There are different types of these loans that you can take out, and they include conversion options, variable rates, and fixed rates.
Fixed-rate Home Equity Loans
This is the traditional and most popular option, also commonly referred to as a second mortgage, and many homeowners prefer it. With this option, a homeowner receives a lump sum based on their right of ownership. The loan comes at a fixed interest rate with fixed monthly payments and a set repayment duration. The repayment term often ranges from 5 to 15 years.
With this option, there is stability and predictability, which enable the borrower to plan their payments and be sure that there will be no surprises. This option is best for projects that have a definite budget or a one-time expense.
Variable-Rate HELOCs
These are the most common lines of credit that you can get with a right of ownership in a property. In case you didn’t know, HELOC means Home Equity Line of Credit. With this option, the lender gives the borrower a maximum credit limit. There is a specified duration known as a draw period, and this can be anywhere from 5 to 10 years. During this period, the borrower can get money from the line of credit as and when they need it, as long as it is within the limit.
The interest rate for this option is often tied to the prime rate and fluctuates over time. The borrower can decide to pay interest only or both interest and principal during this draw period. The main advantage of this option is its flexibility, which allows the borrower to get money whenever they need it.
HELOCs With Conversion Options
This option is where lenders give borrowers the opportunity to convert a portion or all of their outstanding balance to a fixed rate loan. This affords the borrower flexibility which enables them to get a fixed interest rate on a percentage of their line of interest while still maintaining and enjoying the benefits of the revolving credit.
What to look out for before you make a Choice
Having examined these options, we can see that they all have their advantages; it also goes without saying that there will be some negatives with each option. Therefore, there are factors to consider before you make a choice.
Find below some of these factors:-
- Associated Fees and Interest Rates – Consider the type of interest that you prefer based on your income. Do you want the flexibility that comes with the variable rate or you prefer the stability and predictability of the fixed rate? When you decide on what works best for you, compare lenders to find out which ones offer the most favourable interest rates and fees.
- Repayment Terms– Compare monthly payments and repayment terms to find the one that best suits your budget and financial goals.
- Equity Requirements and Criteria for Qualification – This is a very important factor to consider because it will save you time, stress, and even money in the long run. Some qualification criteria requested by lenders include debt-to-income ratio, stability of income, and credit score. Also, look at the minimum right of ownership you are required to have and be sure that you meet the requirement before starting the application process.
Benefits of Home Equity Loans
There are a number of benefits to taking out a loan backed by your right of ownership in a property and they include the following:
- Lower Interest Rates– Loans backed by home equity often come with lower interest rates than unsecured loans. This is obviously because there is something of value that is put down as collateral, which makes the credit a low risk one.
- Fixed Interest and Fixed Repayment Period – This is dependent on the option you choose. If you go with the fixed rate option, you get the predictability and stability of monthly payments at a fixed interest rate for a fixed repayment period.
- Accesses to Large Sums – Borrowers are able to access large sums of money, which they would not have qualified for if not for the right of ownership they have in a property.
Cons of Home Equity Loans
We did mention that these types of credits also have some cons that must be properly considered before one goes ahead with it. These cons include the following:
- Reducing the Value of your Home – Due to the fact that you can get large sums based on home equity, some people go ahead to take out more money than they need. Worse still is when this money is spent on frivolities. At the end of the day, the value of the home is reduced based on the terms of the loan.
- Risk of Foreclosure – This happens when you are unable to repay as at when due and the lender repossesses the home.
- Debt Cycle– This is a situation where the borrower becomes overwhelmed with debt and begins to borrow more and more to try to get out of debts. This often makes it difficult for the homeowner to move or even sell the house due to the reduction in value.
Conclusion
Having looked at the above information, you can see that having home equity is a great asset that can be leveraged in times of financial distress. However, we have also seen that it is not a decision to be taken lightly. Therefore, you need to keep these pieces of information in mind so that, going forward; you can always make informed financial decisions.