The rapid growth of property values in parts of the world has provided homeowners with good sources of financing such as home equity loans. There are hundreds of loan products which cater to specific needs of a borrower. Financial experts recommend consulting a qualified professional who can help determine the best loan for your needs and circumstances.
Understanding home equity loans
Lenders often require collateral such as a home and allow homeowners to borrow up to 80% of their home's equity for various purposes. Equity refers to the difference between the values of your home and any existing mortgage on it. As part of the approval process of home equity loans, lenders ordinarily require applicants to specify the intended use of the borrowed funds and show proof of this purpose.
A borrower may use loan proceeds for financing:
• home renovations
• investing in shares and mutual funds
• buying another property for investment
• refinancing a mortgage
• consolidating credit card debts
• paying for college tuition
• purchasing a new car
Proof of a loan's intended use may include:
• accountant's letter or financial planner's statement of advice preceding share purchase
• letter from conveyancer or copy of the contract of sale for purposes of buying property
• recent credit card statements of accounts to be consolidated
• contractor quotes for planned renovations
How much can you borrow?
How much you can borrow depends on your circumstances: your income, existing loans and assets. With a home equity loan, you can borrow up to 80% of your home's equity and up to 90% by paying Lenders Mortgage Insurance premium (LMI).
Interest rates may be fixed or variable. Fixed rates don't change over the loan period and guarantee the same repayments. These are often higher than the current variable rate and work best for a borrower when the prevailing interest rate is at an all-time low. Financial planners usually recommend a fixed rate loan when interest rates are expected to rise. On the other hand, a variable rate results in different repayment amounts which fluctuate with changes in the market interest rates. Consider a variable interest rate or a fixed loan without exit fees which enable you to avail of the best interest rates during the loan period.
Interest rates need not be expensive for home equity loans. Mortgage brokers can help you shop around for the most favorable rates and terms including no-exit fees, so you can maximize the proceeds of a loan while minimizing your risks.