Home equity loan alternatives: what are my options?

Every time you make a principal mortgage payment, you’re helping to grow the equity in your home. And this equity can be used for a loan.

A home equity loan is when you borrow money against the equity in your home. Common uses for a home equity loan include funding the purchase of an investment property, consolidating debts, renovations, paying off a large bill or other sizable personal or business expenses.

Many lenders offer home equity loans in Australia. Traditionally, these loans are available for longer terms (often 5-15 years). However, longer-term loans don’t always suit everyone’s circumstances. Increasingly, some borrowers only need funds for a shorter period. To meet this demand, many private and specialist lenders now offer short-term home equity loans, which often have a term of 2-36 months.

Are you interested in a home equity loan? Here’s an overview of how it works, a guide to determine the equity you have in your home, and the alternatives to a home equity loan.

How does a home equity loan work?

Home equity is the portion of your home that you own. In a nutshell, it’s the difference between your property’s value and the amount you still need to pay in your mortgage. As the name suggests, a home equity loan allows you to use the equity (money built up) in your home as security. Keep in mind, though, though you typically won’t be able to access the full amount of your equity. There’s a limit as to how much you can borrow against it, which varies from lender to lender.

A home equity loan usually is provided in a lump sum. That is, you receive the approved fixed amount in a single payment. It works like a mortgage where you pay your monthly repayment, which includes interest, over a certain period. This loan is usually at a fixed rate, meaning you’ll make an equal payment each month within the agreed term.

A home equity loan is a popular form of finance as it enables access to funds without the need to sell your property. You can even increase the value of your property, or perhaps build your wealth through wise investments, using the money from the loan. Of course, it all depends on how you will use the loan amount.

Another advantage of a short-term home equity loan is that you can often access a sizeable amount of money with minimal paperwork. You can also apply online, depending on the lender you choose. You may also consider a home equity loan from your existing lender or find a new provider.

How much equity do I have in my home

To determine the amount of equity available in your property, you first need to understand the estimated market value. It’s wise to consult a real estate agent or a valuer to determine the market value. Your home equity is simply the difference between the current value of your property and the total remaining balance you need to pay on your mortgage. Or in other words:

Your home equity = property’s market value – remaining loan balance.

For example, if your home is worth $900,000 and you have a $400,000 remaining balance on your mortgage, your home equity is worth $500,000. Nevertheless, as mentioned previously, not all of this will be accessible to you. Your lender will determine how much equity you can access for your home equity loan.

What are home equity loan alternatives?

Some common home equity loan alternatives include:

1. Cash-out refinancing
According to our friends at Wikipedia, “cash out refinancing (in the case of real property) occurs when a loan is taken out on property already owned, and the loan amount is above and beyond the cost of transaction, payoff of existing liens, and related expenses.” In other words, a cash-out refinance replaces the first mortgage.

The process of applying for a cash-out refinance is similar to any other home loan refinance. The amount of cash you will be able to get also depends on the amount of equity you have in your home. The larger your equity is, the more cash you can access.

2. Personal loans
A personal loan is usually an unsecured loan. That said, there are secured personal loans, whereby you use an existing asset like a car as security to borrow money. Typically an unsecured loan will have higher interest rates than a secured loan, as an unsecured loan is deemed riskier to the lender. Usually, personal loans allow you to borrow a specific amount and repay it with interest in equal payments within the agreed term.

Unlike a home equity loan, a personal loan doesn’t depend on the equity you have in your home. Instead, the lender typically decides how much you can borrow based on your income and credit history.

3. Credit cards
Credit cards offer a line of credit. When applying for a credit card, the lenders will assess your application based on your ability to repay the credit limit over a period of time. While borrowing is relatively easy with such a card, be aware that credit cards typically have high-interest rates, which can become an expensive form of finance if the card isn’t paid in full monthly.

Key takeaway

Home equity loans can help you to access the equity you’ve built up in your home. The amount you can borrow depends on the amount of equity you’ve acquired. However, if you don’t qualify for a home equity loan, or you decide it’s not the right choice, don’t despair! There are many other different types of funding to consider, including cash-out refinancing, personal loans or credit cards.

 

Yanis-Derums

Mango Credit

Yanis Derums is the Founder and Director of Mango Credit– a leading private lender specialising in bridging loans for personal use and business short term loans for commercial and/ or investment purposes. Yanis has extensive experience with financial analysis, credit assessment, product structuring, and general business management

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