What is a Home Equity Loan?

By November 30, 2008Home Equity

Home Equity LoanWhat is home equity?

Your home equity represents the difference between your home’s market value and the debts against it.

Here’s an example of positive home equity.

•    Your home is worth £300,000

•    Your mortgage is £200,000

•    You have a secured loan of £45,000

•    £300,000 market value minus £245,000 cash owing gives you positive home equity of £55,000.

Here’s an example of negative home equity:

•    Your home is worth £300,000

•    Your mortgage is £270,000

•    You have a secured loan of £45,000

•    £300,000 market value minus £315,000 cash owing gives you negative home equity of £15,000.

Obviously, your home equity increases over the years as you pay off your mortgage and property prices rise, as they tend to in the long term.

If you have made any repayments that are larger than usual, or made a few late payments, the balance on your mortgage will be affected. So check that you’ve got your numbers right before calculating the equity in your home.

To calculate home equity accurately, you’ll also need to know the current market value of your home. Get three estate agents round and take the average valuation. Remember you are not obliged to put your home on the market just because the estate agent has given you a valuation! And check local property prices to make sure the agent’s valuation is right for the area.

Free home equity calculators

•    KeyRS.co.uk

•    BBC.co.uk

•    thisismoney.co.uk

If you’re facing repossession and you’ve been in your home for several years, you might have more equity available than you realise. And it might be just what you need to get out of trouble by consolidating your debts.

Home equity loans or ‘secured’ loans

If you own your home and you are a permanent UK resident, you can apply for a home equity or ‘secured’ loan. Equity loans offer low interest rates and long pay back periods. A typical interest rate for a variable secured loan is 8.5%, compared to an unsecured loan interest rate of 16%… almost double.

Obviously your home equity loan is guaranteed by the equity in your home, which is used as security. Because the loan is secured on your home, bear in mind that defaulting on repayments will put you at risk of repossession.

Home equity release schemes for over 55s

Equity release gives immediate access to the equity in your property by giving you a loan against the value of the property. It is paid either as a monthly payment or a lump sum. You stay in your home. You don’t pay the loan off, the debt is settled when you die, or sell the house yourself in order to downsize or fund long term care. Generally, you must be over 55 with at least £40,000 home equity.

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