What is a home equity loan?


A HOME Secured Loan can help you access the funds hidden in the value of your property.

Money can be used to spend money on renovations or pay off debts – this is how a mortgage loan works.

A home loan can help with a big purchase if your savings can't go that far.


A home secured loan can help with a big purchase if your savings can’t stretch that far.Credit: Getty

When you are looking to make a major purchase, it can be difficult to stretch your savings.

Credit cards and personal loans can be expensive, but you can take advantage of the rising value of your property by freeing up cash with a home loan.

What is a home equity loan?

A mortgage loan allows you to borrow money based on the value of your property.

It is sometimes called a second mortgage loan because it allows you to get a loan based on the difference between the value of your property and the amount you owe on your home loan.

Lenders usually allow you to borrow up to 85% of the capital or cash that you have accumulated in the property.

So, if your home is worth $ 500,000 and you have a $ 300,000 mortgage, you can borrow $ 255,000.

How does a mortgage loan work?

You will obviously need to own your own property with a mortgage in order to get a secured home equity loan.

A loan works in a similar way to a standard mortgage.

You will need to fill out an application with a bank, credit union or mortgage broker and your income and credit rating will be assessed.

The lender will also need to evaluate your home.

As with a mortgage, there will be an interest rate and monthly payments.

The term of a mortgage loan is usually shorter than a mortgage – from five to 15 years.

This can be expensive as you end up having to pay off two loans, a mortgage and your own home loan, so make sure you can afford it.

A home equity loan, like your mortgage, is secured by your property, so your home or apartment could be foreclosed if you fail to pay off the debt.

What can a home equity loan be used for?

A home secured loan can be used for any reason to free up cash associated with the value of your property.

You can spend it on home renovations or other debts.

It’s also worth considering other forms of payment that don’t put your home at risk, such as credit card or savings, depending on how much money you need.

How much does a home equity loan cost?

Lenders will charge an interest rate or annual percentage rate (APR) on your home equity loan, which will have to be paid off every month.

Rates range from 3% to 5%, but the amount you can borrow and monthly payments will depend on the value of your property, your income, and your credit rating.

Those with higher income and better credit ratings can usually access better deals.

What are the alternatives?

You can also use the value of your property to get a Home Equity Line of Credit (HELOC).

It acts like a credit card, so you only pay interest on the amount used.

It can be cheaper as you can borrow less.

The monthly payment will depend on the interest rate at the time each amount is withdrawn.

Your home is still in use as collateral, so you could lose it if you fail to make payments.

A credit card or personal loan can also give you access to smaller amounts of cash, but the rates can be higher.

The rate for an individual loan can be around 6%, while the annual interest rate for a credit card can be over 20%.

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