Home Equity Loan & HELOC

A home equity loan enables you to access funds from banks and NBFCs by putting the equity of your house as collateral. It is a second mortgage where you can pledge your home as security even when you have already availed of a loan against it.  

In simple words, the amount of a home equity instalment loan is the difference between the market value of the said property and its mortgaged value. Read on to find out more about this type of loan and what home equity loan rates most banks charge.

There are two home equity loan types for which you can apply from some of the major banks and NBFCs. These include:

• Fixed-rate loans

This loan provides you with a lump sum payment that you can repay at a predetermined interest rate over the loan tenure. 

Its key is that its interest rate does not change according to market conditions. To put it simply, throughout the loan tenure, you will pay the same interest rate.

• Home Equity Line of Credit (HELOC)

The interest rate on a HELOC can fluctuate as per the market conditions. The mechanism of this loan is similar to a credit card. You can borrow a portion of the pre-approved loan from the lending institution. 

The full loan amount has to be repaid on the completion of the loan tenure. Typically, lending institutions offer HELOC as part of the credit card offers. Like credit cards, you can borrow again, as per your credit limit, after settling your dues.

In many aspects, the working mechanism of a home equity loan is just like a house loan. For instance, your house is the equity or collateral for both loan types. 

A home loan allows you only to borrow a maximum of up to 90% of the market value of your house. On the other hand, the home equity loan can be availed for the total market value of your property.

In other words, you receive funds or cash according to the market value of your property. The amount, along with interest, has to be repaid at a fixed interest rate over the loan tenure.

To know the key differences between a home equity loan and a HELOC, you can refer to the table given below:

While home loan equity requirements vary depending on the lender, the following are certain requirements that all lenders need you to fulfil:

• The value of equity of your house must be at least 20% of its market value

• Regular source of income to be attested by two years of ITR filings or bank receipts

• A credit score of more than 600

Mortgage loans are those that are secured against an immovable property, residential or commercial. On the other hand, home equity loans allow you to access funds by putting up the equity of your house as collateral. 

The following table will give you more clarity on the differences between a home equity loan and a mortgage loan:

To calculate the equity or value of your house, lending institutions usually use this formula: 

Value or Equity= Market Value of the House – Outstanding Loan Amount

This can be explained with the help of an example. Suppose the market value of your house is ₹60 Lakhs, and you have an outstanding home loan of ₹40 Lakhs. So, the equation will now read: 

Value/Equity= ₹60,00,000 - ₹40,00,00

In other words, the home equity loan value will be ₹20 Lakhs. But if you don’t have any outstanding home loans, the home loan equity amount will be the same as the market value of your property.