Considerations of Home Equity Loans

Few could deny that we are living in tough economic times and both public and private spending are having to be curtailed where possible. It can be especially difficult for those of advancing years who may have retired and have no wage coming in. Private pensions have been hit hard by falling stock markets and property investments so that benefits may be less than anticipated, and the chancellor is not exactly generous with the state pension. What many elderly people may not realise though, is that, even though they may be cash poor they might be asset rich, and it is possible to convert or all of the assets into cash by using plans such as home equity loans. Those who bought their house many years ago will have seen the gradual rise in property values over the years, and although there have been peaks and troughs, it is likely that their house is presently worth much more than they originally paid for it. The difference between the price paid then and the price they might get on the market today is the equity which normally would only be released by selling the property. An alternative though, which has become quite popular, is to use the equity in the property as collateral against a loan. The loan is paid as a lump sum to be used for whatever purpose desired, but the prudent person could reinvest that lump sum to receive an annuity, ie. an income for life.

There are often certain conditions and restrictions to home equity loans. Usually a first mortgage needs to have been paid off or be approaching the time when it’s paid off, although some companies may entertain a second mortgage for younger persons. The lending company will be taking a legal charge over the property when someone takes a home equity loan, so that if the borrower should die then the house is sold to pay off the debt in the same way as a first mortgage. Taking such a loan may mean less money to be passed on to family then as an inheritance of course.

A major advantage of such a loan, though, is that, because it is secured against a property, there is usually a lower interest rate applicable than with an ordinary unsecured loan. The term of an equity home loan is usually less than a typical first mortgage and early repayment would be subject to a penalty of one to two months’ interest in most cases.

Loans are usually from about £4,000 up to £100,000, depending on circumstances such as the value of the home and any other income. The interest rate will depend partly on the proportion of the amount of the loan to the property’s overall value – the higher that proportion the higher the interest rate would be. A good credit rating is also a distinct advantage, whereas a poor one is likely to mean a higher rate of interest is charged.

The application process for these types of loans is normally fairly straightforward but there may be costs upfront in terms of appraisal fees, title fees, or arrangement fees.

Home equity loans are often termed second mortgages but they are generally cheaper and easier to obtain than actual second mortgages with a high street building society which have come up against tighter rules and regulations. They are also much cheaper than personal loans, particularly for the self-employed or those with less than perfect credit history, and usually allow for a longer term.