What are Home Equity Loan and its Benefits?

home equity loan meaning

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Last updated on 12th January 2024

The "home equity loan meaning" is simple: it's a type of loan where you borrow money using the value of your home as a guarantee. You can think of it like a second loan on your house. If your house is worth more than what you owe on it, you can use that extra value to get this loan. People often use it for big expenses like home repairs or paying off other loans. The bank gives you the money all at once, and you pay it back in fixed monthly amounts.  Thanks to consistent home equity loan rates, the interest rate remains unchanged, ensuring you always know your monthly repayment.

Understanding What is Home Equity And Home Equity Loan

When you're curious about what is a home equity loan or how much of your home you truly own, you're delving into the concept of home equity. It's a straightforward idea. Here's how you determine it:

Equity = Your home's value - What you owe on your loan

Imagine you bought a house for Rs.60 lakh and borrowed Rs.45 lakh to pay for it. The part of the home you really own right now is Rs.15 lakh. It's like this:

House price (60,00,000) - Loan amount (45,00,000) = Equity(15,00,000)

In this situation, you could potentially take an equity loan up to Rs.15 lakh, as that's the equity you have in the house.

Now, let's say after some years, your house price goes up to Rs.80 lakh. And you've paid back some of your loan, so you only owe Rs.22.5 lakh. Now, the part of the home you own would be:

New house price (80,00,000) - Loan left (22,50,000) = Equity (57,50,000)

In this situation, you could potentially take a home equity loan up to Rs.57.5 lakh.

But, house prices can go up and down. If they go down, the part you own might be less.

Also Read: Subsidy on home loan by government 2023

What Are The Types Of Home Equity Loans?

There are primarily two equity home loan types, each with its benefits.

  1. A fixed interest rate home loan equity gives you a specific amount of money once. You then pay it back in regular, equal monthly payments. The interest rate stays the same the whole time, so there are no surprises.
  2. In contrast, a home equity line of credit (HELOC) is like a credit card but uses your home's value. You can borrow money when you need it and only pay interest on what you use. The payments might change, but you need to pay back everything by the end of the loan.
Feature Fixed-rate Home Equity Loans Home Equity Line of Credit (HELOC)
Nature of Loan One-time lump sum loan. Flexible credit line, similar to a credit card.
Interest Rate Fixed (remains the same throughout the loan's duration). Variable (can change based on market conditions).
Borrowing Mechanism Borrow a specific amount all at once. Borrow up to a set limit, repay, and borrow again as needed.
Repayment Regular monthly payments with a set interest rate.
Flexible borrowing and repayment, but must repay fully by the end.
Suitability For those who prefer predictability in repayments. For those who want flexibility in borrowing and repaying.

It's crucial to know how to get a home equity loan and understand the current interest rates on home equity loans.

Also Read: Top 10 banks for home loans in India

Benefits of Home Equity Loans

  • Save Money on Interest: Home equity loans have lower interest rates than most other loans or credit cards. So, you end up saving money in the long run.
  • Borrow a Good Amount: If you need a lot of money for big things, like fixing your home or paying for school, this loan can help. It lets you borrow based on how much your home is worth. If you use the loan money to fix or upgrade your home, its price can go up. This means your home might sell for more money in the future.
  • Easy to Plan: You pay the same amount every month. So, you always know how much money you need to set aside for the loan.
  • Get the Loan Faster: Since you're using your home as a guarantee, banks often approve this loan quicker than other loans.
  • No Extra Fees for Early Pay: Some loans charge you home loan foreclosure charges if you pay them back early. But many home equity loans don't.

For those exploring options, it's essential to research home equity loans and identify the best home equity line of credit lenders to make an informed decision.

FAQs about the Home Equity Loans

A home equity loan is like a second loan on your house. It lets you borrow money based on how much of your house you really own. If your house is worth more than what you owe on it, you can use that extra value to get this loan. The bank gives you the money all at once, and you pay it back bit by bit, every month.

Getting a home equity loan means borrowing money using your home as a promise to pay back. But there's a big risk: if you can't pay the loan, the bank might take your home. Also, if your home's price goes down, you could end up owing more money than your home is worth. And sometimes, there are extra costs and higher interest, which means you pay more in the long run.

When you want to buy a house but don't have all the money, you take a home loan. The bank gives you this money, and over time, you pay them back. Now, after some years, if your house's price goes up and you've paid a part of your home loan, you have what's called 'equity'. This equity is like a value you own in your house. An equity loan lets you borrow money based on this value. So, a home loan helps you buy a house, while an equity loan gives you money based on how much of your house you truly own.

Let's say you bought a house for Rs. 50 lakhs and took a loan of Rs. 40 lakhs. Over time, you've paid back Rs. 10 lakhs and the house's value has risen to Rs. 60 lakhs. Now, the difference between your house's value and what you owe is Rs. 30 lakhs. This is your equity. A home equity loan lets you borrow money using this Rs. 30 lakhs as a guarantee. So, you could get a loan for a portion of this amount, like Rs. 20 lakhs, to use for other needs.

This equity is like a special savings in your home. A home equity loan lets you use this savings to borrow money. It's different from a regular loan because your home acts as a guarantee. This often means you get a cheaper interest rate. But, if you can't pay back the loan, the bank could take your home.

A home equity loan lets you borrow using your home's value. It often has a lower interest rate than regular loans.

A home equity loan uses your home's value to borrow money. It often has lower interest rates than other loans.

The primary benefit of a home equity loan is that it offers financial flexibility, especially in emergencies. It allows homeowners to access a significant amount of cash relatively quickly, using the value they've built up in their home as security.

A home equity loan lets you borrow using your home's value, often at lower rates than other loans.

Published on 27th September 2023