A home equity loan is a loan for a fixed amount of money that is secured by your home.
To provide a home equity loan, bank employees must be sure of the ability to sell the property, which acts as collateral without any problems. For this confidence, banks resort to the help of specialists from law firms. These are professional independent appraisers, whose responsibilities include determining the market value of the property as of the date of the contract.
The size of the loan directly depends on the amount that can actually be obtained for the collateral – home. A person taking out a home equity loan can get an amount equal to up to 80% of its value. Banks impose certain requirements on apartments pledged as collateral.
An apartment must:
- be connected to the heating system;
- be provided with cold and hot water supply;
- have serviceable windows, doors, roof and plumbing fixtures.
A home equity loan must be located in a building that:
- has a foundation;
- not delivered for overhaul;
- is not in an emergency condition.
When home equity loans are beneficial
A home equity loan is beneficial in a variety of circumstances:
- This solution is often used to make the first installment on a mortgage;
- If you are not approved for a consumer loan without collateral;
- If you are not satisfied with the conditions of targeted programs for buying a car, education, repairs, etc.
We will analyze two common cases in more detail.
Mortgages on new real estate secured by the home are common. This is due to the fact that banks have serious collateral requirements. It is difficult to convince people to approve a mortgage for a share in a communal apartment, panel houses, or housing with uncoordinated redevelopments. Therefore, it is a great option for buyers facing similar difficulties.
Individual entrepreneurs and business owners have little chance of getting a consumer loan without collateral. In such cases, secured loans will help to obtain funds, but the loan amount rarely exceeds 50% of the value of the collateral.
According to the current legislation, banks cannot impose credit insurance on the borrower, but they can easily decline your loan without insurance!
Of course, insurance is an additional expense. The cost of applying for a policy depends on many factors, including the total loan amount. However, having insurance protects you, as a borrower, from all sorts of risky situations, including financial difficulties and inability to repay the loan. Do not skimp in this case. Saving on insurance is fraught with negative consequences.
The recipient of the loan can choose any insurance company, the conditions of which are the most optimal and profitable.
We figured out how to take out a home equity loan. However, before you transfer your property as collateral, you need to take into account several nuances:
- Throughout the entire time when the apartment is pledged, you cannot make any transactions with the object – sell, donate, inherit;
- The pledged apartment cannot be rented out. This is especially true for cases when the borrower wants to receive income from the delivery and cover the loan debt;
- Any real estate object – an apartment, a house, an office, a summer residence, a land plot or even a garage – can act as collateral. The main thing is liquidity and the absence of encumbrances;
- There are growing equity loans where monthly payments increase over time according to a set schedule.
A home equity loan is a really great way to buy an apartment if you cannot get a mortgage or you urgently need money. The most important rule is to calculate your strength and avoid delays in payment.