Home Equity Loans
Home equity is a financial term, which means the actual value of the house after all the liabilities against it are paid. It is, therefore, the net monetary value of the property. To explain it in mathematical terms, home equity is the net value of the house after total liabilities are subtracted from its total market value.
Suppose the value of your home has been appraised at £200,000.00 and your mortgage loan is £125,000.00, your home equity is £75,000.00. Though this is the basic formula for calculating home equity, the calculations can become a bit complex in certain situations. You must keep in mind that home equity is the net value after paying off all the liabilities. Now these liabilities may also involve your liens or second mortgage on your home and so these also have to be kept in mind when the value of the house is calculated.
Let us for the sake of example consider that you have taken a loan for your house but for some reason are unable to pay the installment amount which is due. If you default on your payments, it may lead to foreclosure or in other words, the lender may sell your house to raise the money he has lent. In situations such as this, you can raise another loan based on the market value of the house. Home equity loan is in a way like a second mortgage. You can pay off your original loan through the loan that you have raised against your property.
Then there may be other scenarios. You may have enough financial resources to pay off your installments but require a substantial amount for some other purpose, for example, to fund your child's education. Then again you may need to pay off some outstanding medical bills. In all such situations, you can use your established home equity to raise the required funds.
Home equity is also an attractive option for the people with poor credit ratings who find it difficult to obtain loans otherwise. Basically, a home equity loan is a win-win situation for both the lender and the buyer. The lender knows that his money is secure; the borrower can not run away with the property and so the collateral is safe. For the borrower it is his home that is at stake and so there is high probability he will do the utmost to pay off the loan.
The greatest benefit of home equity loan is that you can borrow a substantial amount of money against your house to meet some of your larger expenses. For example, you may want to renovate your home or even pay for the higher education of your children. You can also use the funds raised to finance the purchase of a second home you wish to buy. Alternatively, you can also consolidate high-interest debts that you may have. With a home equity loan you can borrow up to 80% of the total equity of your house. People use their houses as collaterals based on the reason that the value of the property will gradually appreciate and their expenses will be covered once they sell.
