Home equity is a valuable financial asset that often lies dormant within the walls of your home. It represents the difference between your property’s current market value and the amount you owe on your mortgage. In India, homeowners have two popular ways to tap into this resource: home equity loans and home equity lines of credit.
These tools for managing your finances could help you get that dream mortgage at an affordable cost compared to what is being charged by various financial institutions.
What Is Home Equity?
Let us first define home equity before considering how it can be used to qualify for a better mortgage and the advantages based on this strategy.
Home equity is the real ownership of your home. It’s the value that has been raised by you, a part of its money within the claim method plus market changes that are owning it.
In simple terms, if your home is currently worth ₹1 crore, and your outstanding mortgage balance is ₹50 lakhs, your home equity stands at ₹50 lakhs.
How Home Equity Can Help You Qualify for a Better Mortgage
It will be imperative that potential borrowers should have various aspects put into consideration by money lenders concerning one’s qualifications as well as the rate that will be charged to him/her. At the same time, one of the main issues that require attention in this regard is the Loan Value Ratio (LTV). LTV is calculated as a percentage made by dividing the remaining amount for a mortgage from the selling price at that moment. A higher percentage shows increased risk exposure of the borrower towards the financing entity.
Here is a guide to improving your mortgage using home equity:
1. Reducing Your LTV
Obtaining equity in the house will assist in paying off the home loan leading to reduced LTV. Subsequently, lower LTV will enable one to access better loan plans and reduced interest rates as financial institutions find them less risky.
You can have a loan-to-value ratio of 80 percent (LTV 80 percent), then through using your household capital save it down to 70 percent. The obvious implication of this small action is that there will be a lot more costs saved as time goes by under your loan repayment regime.
2. Increasing Your Down Payment
If you do not have enough money for a large deposit, taking out a loan against your property will provide you with sufficient money to make a bigger deposit. This will both increase your chances of getting a mortgage and enable you to have better terms. A larger down payment can also boost your mortgage opportunities.
Benefits of a Better Mortgage Rated
We know how home equity makes getting a better mortgage deal possible. Therefore, let us talk about securing a lower mortgage rate for the following advantages.
1. Savings Over Time
A lower mortgage rate translates into substantial long-term savings. Consider this: If you have a ₹1 crore mortgage with a 7% interest rate, you’ll be shelling out ₹70,000 in interest annually. However, refinancing to a lower rate, say 6%, would save you ₹10,000 per year. Over the life of the loan, these savings can add up to thousands, if not lakhs, of rupees.
2. Enhanced Borrowing Capacity
When you secure a lower interest rate, the borrowing capacity increases too. In most cases, higher interest rates result in additional requirements from money lenders. Lower rates mean that more cash may be given or a shorter term selected.
How to Leverage Home Equity for a Better Mortgage
Since the attraction towards a better mortgage rate is now evident, we can now deliberate on how we can achieve it:
1. Shop Around for Lenders
Home equity loans and HELOCs’ interest rates and terms offered by different lending institutions are varied. Potential borrowers must compare terms and rates from different money lenders to get the best deal possible. This leg can significantly influence the rate at which one will borrow his/her home loan.
2. Get pre-approved
It is advisable to first get a pre-approval from a lender before applying for a home equity loan or HELOC to enjoy subsidized rates on mortgages. This will give you an idea of the amount of money to expect from the loan as well as an estimate of the associated interest rate. This data will help you make judicious choices regarding your financial planning.
3. Use Home Equity Wisely
Economically speaking, it might be a good thing to take this equity thing in your home. However, the money should be spent wisely. Things like paying off high-interest debts and consolidating debts are good examples of financial improvement procedures. Meanwhile, one can use one’s home equity mortgage to get a better rate without jeopardizing his or her financial standing.
Risks of Using Home Equity for a Mortgage
As is the case with any financial pursuit, home equity presents a set of risks when it is employed as security for a loan:
1. Risk of Home Loss
The most important thing to remember when defaulting on a home equity loan or HELOC is that this may force you into foreclosure, and this will imperatively lead to homelessness; therefore, people will refer to your situation as if you are homeless except that homeownership is lost. Borrow wisely; you should afford your repayment responsibilities.
2. Impact of Rising Interest Rates
If rates rise, it might be difficult for you to handle an abrupt upward adjustment which eventually could spike prices for your house or even force you into foreclosure.
3. Declining Home Values
This makes it difficult for one to get a refund or to make a profit from selling his house when the market value falls significantly, in such circumstances the only way to make money out of your house is by renting it out at an exorbitant cost regardless of size.
4. Beware of Fraud
Unfortunately, a lot of malicious lenders take advantage of homeowners who wish to have access to their house equity. You should be careful and deeply study the interests of any lender before taking a loan.
Conclusion
House equity offers a strong financial instrument to owners of houses in India because Home equity can have a significant impact on many aspects of homeownership in India. For example, applying the equity you have can make qualifying for a more affordable mortgage possible; it may also lead to reduced interest rates; last but not least, cutting taxes may be a side effect of it.
It is important for an individual to understand the dangers that come with this before proceeding; nevertheless, one needs not fear if they have enough patience because eventually things will get back to normalcy. However, unlocking one’s home equity has been viewed as a gateway out of poverty for some time now. The potentiality of unlocking one’s home equity may lead one to financial stability. With it, you can be able to get a better mortgage interest rate as well as pay less on interest which will improve your financial situation generally. Imagine building the house of your dreams with proper planning and confidence. Secure it today making a sound decision with a better advisor at Ruloans.
FAQs
What is the difference between a home equity loan and a HELOC?
- A home equity loan provides a lump sum of money borrowed against your home equity, while a HELOC is a revolving line of credit that allows you to borrow funds as needed, up to a predetermined limit.
How can I use my home equity to pay down debt?
- You can use your home equity to pay down high-interest debt by taking out a home equity loan or HELOC and using the proceeds to repay your outstanding debts.
Are there tax benefits to using home equity for mortgage qualification in India?
- While there may be tax benefits associated with home equity loans or HELOCs in India, it’s essential to consult with a tax professional to understand the specific implications of your situation.
Key Takeaways
- Home equity can help you qualify for a better mortgage by reducing your loan-to-value ratio (LTV) and increasing your down payment.
- A lower mortgage rate can lead to substantial savings over time and potentially enhance your borrowing capacity.
- To leverage home equity effectively, shop around for lenders, get pre-approved, and use the funds wisely.
- Be aware of the risks, including the potential loss of your home, rising interest rates, declining home values, and
