Home Equity Loan
If you are a home owner, and over time have built up some equity in the property thanks to rising house prices and the fact that you have already paid off part or all of your mortgage, then freeing up the money trapped within the property can make huge changes to your life. Whether you are want the money to consolidate your existing loans and credit card payments into a single convenient repayment, or want to free up some cash for much needed home improvements, a new car, or even a holiday, releasing the equity trapped in your property is a gateway to a new life that can free you from many of your old debts quickly and cheaply.
The simplest way to free up the equity that you have in your home is to take out a secured home loan. Unlike a full equity release programme, in which you sell a stake in the property to a finance company, a home equity loan is repaid over time, and once the term is complete, you have no further liability to the lender.
Whenever a person borrows money from a bank or other finance company a fee is charged based on the amount and the cost associated with lending it. This fee is charged in the form of the interest rate, and calculating it takes many factors into account that reflect the risk of the borrower defaulting on the loan amongst other things.
A personal loan or credit card will typically have quite a high interest rate, because the if the borrower fails to pay it back, the cost of recovering outstanding money is very high, as it will involve recourse to the courts, and no guarantee of full repayment.
With a secured home loan, the risk to the lender is much lower. In effect, when a home equity loan is granted, it is paid to a person who already has the exact amount of the loan in an asset. Rather than borrowing money that they do not have, a person with a secured loan is effectively freeing money that is already theirs, and transferring it into a simpler to access form.
A loan secured against the equity held in a house is offered at a much lower interest rate because the risk of the lender losing their money is low. This means that the borrower can actually benefit financially in a number of ways from the loan.
Because house prices generally rise over time, the equity in your house will increase over time. This can actually offset the cost of borrowing the money, and in some cases, when the value of the house rises particularly quickly, this can exceed the cost of the interest, making borrowing the money effectively free of charge. If you have borrowed money to carry out home improvements such as building an extension, or carrying out a loft conversion, this will generally add more to the value of a building than it costs, and again, offset any costs from taking out and repaying the loan, making you a profit from borrowing the money.