Know more about Home Equity Loan Vs. HELOC

Home Equity Loan

Know more about Home Equity Loan Vs. HELOC

✓ Home Loan from ₹2 Lakhs To ₹15 Cr ✓ Multiple Lending Partners ✓ Interest Rates Starting @ 7.70%

Home equity loans, also known as equity or home-equity installment loans, can be availed by mortgaging your residential or non-residential property. The loan amount is contingent upon the present market value of your property/house.

Home Equity Loan Types

You can avail two types of home equity loans:

  • Fixed-rate loans

  • Home Equity Line of Credit (HELOC)

1. Fixed-rate loans: This type of home equity loan can provide you with a lump sum payment. You can choose to repay the loan amount at the predetermined interest rate over the loan tenure. The key highlight of the fixed-rate home equity loan is that the interest rate does not change according to market conditions. To put it simply, throughout the loan tenure, you will pay the same interest rate.

2. 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. Just like a credit card, you have the option to borrow again, in accordance with your credit limit, after settling your dues.

Working Mechanism of a Home Equity Loan

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. But while a home loan allows you only to borrow a maximum of up to 90% of the market value of your house, 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, which then has to be repaid at the fixed interest rate over the loan tenure.

Features and Benefits of Home Equity Loan

Here’s a look at the advantages of a home equity loan:

  • Convenient and easy: You can qualify for this loan easily as this is a secured loan. As you pledge your house as collateral for availing this loan, financial institutions can provide this loan even if you don’t have a good credit score.

  • Helps convert the market value of a house into cash: With a home equity loan, you can easily receive a loan amount corresponding to your house’s market value.

  • Allows to meet the cost of any big-ticket expense: The home equity loan can help you receive a lump sum amount. You can then use it for meeting the cost of any big-ticket expense.

  • Fixed rates of interest: The key advantage of a home equity loan is that the interest rate is not affected by market fluctuations and remains fixed throughout the loan tenure.

Features and Benefits of HELOC

The Home Equity Line of Credit (HELOC) has multiple advantages. Here’s a look:

  • Borrow as per your requirement: With a HELOC, you have the option to borrow a portion of your available credit limit.

  • Borrow the amount again after repayment: Once you settle your dues, you have the option to borrow the loan amount again.

  • Pay lesser interest: With a HELOC, you are charged interest only on the borrowed amount.

  • Flexibility in withdrawals: As a HELOC allows you to borrow portions of your total credit limit continuously, you can use it to meet mid to short-term financial goals, requiring regular payments.

Key Differences between Home Equity Loan and HELOC

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

Features

Home Equity Loan

HELOC

Interest rate

Fixed

Varies according to market conditions

Loan amount

Lump-sum amount

Pre-approved amount

Repayment

EMI payments involving both interest and principal components

You have to pay only for the interest amount

Popularity

Popular in India

Comparatively lesser-known in India

 

Calculation of Home Equity Loan

To calculate the equity or value of your house, lending institutions usually use the formula: Value or equity=market value of the house-loan amount outstanding.

This can be explained with the help of an example. Suppose the market value of your house is Rs. 60 Lakhs, and you have an outstanding home loan of Rs. 40 Lakhs. So the equation will now read: Value/Equity= Rs. 60,00,000-Rs. 40,00,00. In other words, the home equity loan value will be Rs. 20 Lakhs.

But if you don’t have any outstanding home loan, the home loan equity amount will be the same as the market value of your property. 

Home Equity Loan FAQs

  • ✔️How can I use the home equity loan?

    You can use the lump sum amount of a home equity loan to meet your big-ticket personal expenses.

  • ✔️Is there a cap on the maximum amount of home equity loans?

    Lending institutions provide the maximum amount of home equity loan according to the market value of your property. If you have any outstanding home loan obligations, they will be deducted from the market value of your property. 

  • ✔️Do I need to compulsorily pledge my house as collateral for availing a home equity loan?

    Yes, the home equity loan can only be availed against the equity on a house.

  • ✔️Does a home equity loan provide any tax benefits?

    No, there are no tax benefits on a home equity loan.

  • ✔️Does a home equity loan require a good credit score?

    No, being a secured loan, this loan doesn’t come with the mandatory requirement of having a good credit score.