Concept Of Home Equity
We know, equity investment refers to investment in equity shares of Companies, the value of which will go up or down based on the performance of the Company and other environmental factors. Similarly, when investment is made in a Home, loan can be arranged for 75-85% of the value of the property on an average. Over a period of time, when the value of the property appreciates, the percentage of loan attached to the market value of the property becomes low. Now, the loan amount becomes, say 20% of the market value of the property. As such, the 80% of the value of the property can be utilized for raising further topup loan, which may be utilized for renovation of the property or pay off other debts. We had discussed that Mortgage refinance involves relatively lesser amount of loan and the refinancing banker does not find it attractive. Here, it is worth considering this option. When the loan amount required for repaying the earlier mortgage is very less compared to the market value of the property i.e., if sufficient equity is built up in the property, the bank can be requested for an additional loan to purchase a plot of land. The Banker gets to disburse higher loan amount against a collateral security and the borrower gets to purchase a highly appreciable property at a rate of interest that will definitely be far below any personal loan.
While considering a mortgage refinance with the agency of the Bank, it is wise to discuss the other investments ideas or some other existing personal loans or high outstanding dues to Credit card companies, if any. They may come out ideas or ways or tips to get the best out of the deal. Say for example, while refinancing home loan, the other debts can also be refinanced with a topup loan in the name of home improvement or home renovation, etc. Of course, the interest rate on top up loan will have a premium in the form a nominal higher interest rate. This will ensure that the full benefits of the equity built up in the property is utilised to the optimum extent.
A market survey may be taken to know which banker gives maximum percentage of loan for the value of the property. Say, some banker give 80% of the value and some give 95% and so on. Hence, choosing a banker who gives higher percentage of loan will enable to help to raise higher amount of loan for properties with higher equity built up in the property.
It is to be noted that resorting to mortgage refinancing in the earlier part of the loan tenure will give advantage of lower interest rate when the loan value is at the highest but the possibility of raising more loan from the property is remote, as it will require at least two to three years for significant improvement in the equity of the property.
A home equity line of credit can be used at any time for any purpose, but there are several fees associated with a home equity line of credit. Therefore it important to Choose a Bank that offers competitive rates and does not eat up a large chunk of your loan with assorted fees.