For many of us who have fallen on hard times, the solution to the problem can be closer to home than we may have thought. The value of our own property can provide a route to a cash bonanza that will see outstanding debts cleared. A home equity loan can see a person return to a state of financial security.
It may seem illogical that an existing mortgage can be overlooked and the potential for further funds on a home be identified. But it is possible to get loans approved based on home equity. Basically, the equation is based on the fact that, as we pay our mortgage, the ratio of property debt-to-income changes in favour of the borrower, while time can see the value of the home increase too.
So, in getting loans through equity in the home, a significant cash injection can be secured to clear outstanding household bills, as well as existing personal and credit card debt. Sudden significant expenses, like medical bills, can also be dealt with almost immediately.
How Equity Works
The basis of equity lies in the fact that with each mortgage repayment made, the value of the property owned increases, creating room for a home equity loan. For example, if a mortgage is $250,000, with repayments per month of $900 over 25 years, after 5 years, some $55,000 would have been taken off the mortgage principal. Therefore, the available equity increases by $55,000.
However, loans approved based on home equity also take account of changes in the property market, which generally moves upwards. Over the same period, the property value may increase to $275,000. This means that when applying for a loan through equity in the home, the applicant can access up to $80,000.
But perhaps a cash sum of $40,000 is all that is required, which means that a home equity loan should be applied for that clears the existing mortgage and provides the extra cash. This means that a figure of $235,000 can be applied for, which is less than the original, making repayments more manageable and yet providing the much needed extra cash.
Advantage of Taking the Equity Route
There are two principal advantages to getting loans approved based on home equity rather than simply a large personal loan. The most obvious one is that the original mortgage is repaid, which immediately has a positive impact on the credit rating of the borrower.
This in turn means that some of the terms of a renewed loan can be better, such as the interest rate falling. This mean that getting a loan through equity in the home, is sure to have a lower interest rate than any other kind of loan.
The second major advantage in home equity loans is that the potential is always there to repeat the feat and seek another large cash injection. So, after a few more years, when the loan has seen a large portion repaid, and the value of then property has increase a little more, the borrower can seek to once again have a loan approved based on home equity.
However, this kind of refinancing strategy can only work if the value of the loan through equity in the home is lower than the original loan. The reason is that the significant benefits will be missed if the loan total remains the same, or increases. The interest rates may drop, making a larger home equity loan tempting, but remember that the degree of savings depends on the size of the principal.
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