If you thought your home is worth nothing except for living purposes, then think again. It might be holding a treasure, still waiting to be explored. Wait before you deface it with a spade. What we mean is the equity that your home has kept on amassing all through the years. Home equity is the actual worth of the home in the market.
The equity in the home normally ascends. It is primarily because of the efforts put in by the homeowner. The owner keeps on making new improvements to his home according to his requirements. He may add new storeys to his house, or may change the flooring. These may, besides adding to the value of the house aesthetically, attract more tenants.
There may also be a rise in home equity because of no efforts by the homeowner. Real estate has become one of the safest options to place ones bet on. This has given a boost to the property prices, with the prices jumping by 125% in some posh locations. Some localized circumstances like improvement in road infrastructure, launch of a shopping mall, etc. too can be behind this increase in home equity.
Home equity will be of immense help to people who do not prefer to sell their home, but need resources to meet over some contingency. Resources are needed largely for spending on home improvements. However, the loan amount can be used for other purposes too without any limitations. Homeowners are allowed to take loans against their home. These loans are called home equity loans because they take advantage of the equity.
Having a solid collateral base of home, the lenders feel less exposed to risk. Lenders charge a lower APR on the home equity loans. The home equity loans are thus cheaper than the other loans.
The equity is reduced by the amount of loan taken against the home. As the balance on the loan reduces with monthly repayments, the equity in home increases. Except for reverse mortgages, all other loans and mortgages follow this principle.
A fallacy doing rounds among the borrowers is that their house is under risk of repossession if they take up a home equity loan. However, this is not completely true. The lender just has the lien to your home, which can only be exercised if the borrower is not able to repay the loan. In the meanwhile, the customer can continue living in his home without any intrusion.
The lender can initiate the proceedings for repossession of the house only when the customer has not paid the installments on the loan. Rarely would a person knowingly put his home in danger. The borrower, after studying all aspects of his financial condition, determines the monthly repayments. But, rarely is the planning foolproof. There are some situations that you might not have provided for; and this becomes your vulnerability. Because of the difficulty in paying the installments, the customers fear repossession, which can become a reality very soon.
Avoiding loans against your home for every frivolous reason can be a way to stop this from becoming a reality. True, home equity loans are cheaper and easier to get. But think of the after-effects of any such move. Your circumstances may change, making the repayments difficult.
Numerous loans against ones home will only result in depletion of the home equity. The savings in equity will work in the same way as the savings in money. Therefore, even if you do not have savings, you can always rely on your home to offer support. Complete exhaustion of the equity will disqualify you from taking help of the home equity.
So, before taking loan against your home the next time, think twice. Think what your home means to you, and how you are going to do without it. This will ensure that the decision regarding the future of the home is taken with added rationality.
