As new borrowers, home equity loans are one of the smartest ways to use your valuable assets.
If you have a home, and you already paid off a portion of that house, then the difference between the value of your home and the total debt you owe is your equity. It is your interest in the said property.
How much can I borrow against my home equity?
You can only borrow the amount which is equivalent to your interest in your property.
For example, you bought a home worth $250,000. You made a 25% down payment and obtained a loan to cover the remaining 80% of the purchase price. The value of your home is $250,000 and your equity or the amount you contributed to the purchase price is only 25% or $62,500.
While the lender secures their interest by getting a lien on your house, you still own it. However, as much as your home equity is concerned, you only “own” 25% of it.
Supposing the market value of your home doubled in the next six months, but you still owe $187,500 (or 80% of the purchase price), your home equity will increase. But, the principal amount of your loan will stay the same. Meaning, while your debt is still $187,500 your original home equity which is $62,500 will double. This is just a simplified computation. Other factors such as accrued interests, fees and penalties will still apply.
How can I build my home equity?
- Make double payments covering both the principal and the interests
- Increase your initial down payment on the mortgage. Instead of the standard 20 per cent down payment you can add another 5 per cent to get exactly 25 per cent home equity, or 25% of the market value of your home.
- Invest in home improvements such as renovations, adding energy-efficient appliances and fixing the plumbing issues.
Credit score and home equity
Before applying for home equity loans, new borrowers must be aware of their credit score. Multiple debts that spiral out of control can swiftly affect your daily life in big ways. Interests may roll over until they become difficult to repay.
Lenders are most likely to approve loan application from individuals with good credit history, or those who have repaid their credit obligations on time. People with good employment record, especially those who were able to stay in the same company for several years are considered more financially stable than self-employed ones. But, people with a low credit score do not have the same privileges as those with excellent credit history. But, if you own a home, you can use its unencumbered value to pay for your current expenses.
If you want to obtain home financing loans with favourable terms and at a lower cost, the Australian Lending Centre can help you. Aside from offering a more appealing rate, they also help you settle your multiple loans through their debt relief programs such as refinance, credit card consolidation, debt relief, debt management and debt agreement services.
Learn more about home equity loans and choose the most suitable loan products to meet your financial needs. Contact the Australian Lending Centre today!