Home Equity Loans

Home Equity Loans Home equity loans, also known as second mortgages, are secured against the equity in a home. As borrowers can apply for these types of loans without having paid off their mortgages in full, they are an accessible option for people looking to access funds to make investments or purchases. Used in the right way, a home equity loan can give a business the capital injection required for expansion.

Home Equity Loans Defined

Home equity loans are loans that use built-up equity in a home as collateral. The equity you have in your home is calculated by subtracting the current market value of your house from the amount you still owe on your existing home loan. As such, equity can be built up through capital gains and repayments made on the pre-existing mortgage.

Eligibility

Eligibility criteria will depend on the lender, but as these are secured loans they can usually be much easier to obtain than other types of loans. The primary criterion is equity in your home.

Uses and Purpose

While home equity loans can be used to finance an emergency or address financial stress, sometimes these loans are used for investment or business purposes. Investors can use these loans to take advantage of an investment opportunity or to grow a business more quickly.

Types of Home Equity Loans

Home equity loans will vary from lender to lender, but there are two major types of home equity loans. There is the standard type of loan, where repayments include both principal and interest. Some lenders offer interest-only home equity loans, where for an initial period the borrower makes repayments on only the interest component of the loan.

Advantages of Home Equity Loans

Home equity loans have a number of advantages for the borrower. These types of loans help homeowners put their unused equity to work. They may come with lower interest rates and present a convenience option for obtaining financing.

  • Convenience and accessibility – It’s easy for homeowners who have built up some equity in their homes to tap into that equity to purchase something, start a business, buy another property or realise some other investment or purchase goal.
  • Lower interest rates – Interest rates can be lower for home equity loans, as the loan is secured by the equity in the property. As such, it offers a cheaper financing option for the borrower.
  • Unused potential – A home equity loans gives the homeowner a way to utilise an underused asset. In an investment or asset context, the home equity is otherwise not being used to its full potential.
  • Tax deduction – Taking out a home-equity loan can enhance your tax strategy, as the interest payable on your home-equity loan could be tax deductible.

Potential Limitations of Home-Equity Loans

Home-equity loans can be an excellent financing option, but as with any type of loan, the borrower must ensure that they can meet the repayments. A home-equity loan uses your home as collateral, and it usually extends the term period of your existing home loan and requires highly periodic repayments.