What can a home equity loan be used for? Home equity loans are a fantastic credit option for some homeowners wanting to renovate, consolidate debts and much more. Learn the most common reasons for accessing your home’s equity here!
What is home equity?
Home equity is the amount of money you own in your home. It is calculated by taking your remaining mortgage balance owed away from the property’s current market value. For example, if you have a home worth £350,000 and you still owe £200,000 on the mortgage, then you would have £150,000 home equity (£350,000 – £200,000).
Home equity is based on the current market value rather than the initial purchasing price of the home. If the property goes up or down then so will your equity.
Can I use the equity in my house to get a loan?
You can use the equity in your home to get a loan for a similar amount, known as a home equity loan. A lender will usually offer home equity loans up to 85% of the home equity you have. So, if you have £100,000 of equity, you might be able to get one of these loans up to £85,000. However, no equity loan is guaranteed and you’ll still be subject to criteria and checks.
A home equity loan is different from an unsecured personal loan because the loan uses the equity in your property as collateral. If you do not repay the home equity loan, the lender can use foreclosure to get their money back. Foreclosure is when the lender forces you to sell your property and then give some of the money from the sale to pay off the remaining balance of the home equity loan.
Home equity loan vs home equity line of credit
Another option to access your home equity is to use a home equity line of credit (HELOC). The difference between home equity loans and HELOCs is that the loan is paid out in a lump sum usually with a fixed interest rate, whereas a HELOC is paid out in instalments called the draw period typically with a variable interest rate.
Are home equity loans a good idea?
If you need a significant amount of credit and have home equity, a home equity loan or HELOC can be a good idea. Both options usually have a lower interest rate than other credit options, such as personal loans. You may even be able to use them to pay off your existing mortgage and save some money on interest.
However, you should always research all your credit options before making a decision and ensure you know the full risks. It is advised to get help from a money advice group and professional UK mortgage advice before making a decision.
What is the downside of a home equity loan?
The main downside of a home equity loan is that it puts your home on the line. If you fail to repay the loan the lender could start foreclosure proceedings and force you to sell the property. However, most lenders will not use this as a first resort and will adjust the loan to make it more affordable. You may end up having to repay for longer in this case.
Another downside is that home equity loans often come with a closing fee ranging from 2-5% of the total loan value. This means for every £1,000 you borrow in a home equity loan, you may be asked to pay £20-50 at the end.
What are equity loans used for?
Home equity loans can be used for many purposes. Most lenders do not put restrictions on what the money can be used for. Here are five common reasons homeowners choose to take out a home equity loan:
- Home renovations
Some choose to use home equity to complete home renovations. And we’re not just talking about a lick of paint here and there. Due to the significant amounts of money available, people use it to build conservatories, extensions, add swimming pools and much more.
The benefit of putting the money back into your property is that these renovations can increase the value of your home. Thus, you can actually increase its worth and increase the equity you have simultaneously.
- Debt consolidation
Debt consolidation is when you move all your lines of credit and/or debts into one place. The new place you put them should have a lower interest rate than what you’re paying elsewhere. A home equity loan is an ideal place to consolidate credit cards, store cards and personal loans because you can access larger amounts usually with lower interest.
- Pay education or medical bills
Home equity is also frequently used to pay for private schooling or university degrees, often postgraduate where there is no or little government support. Moreover, it can also be used to pay for expensive medical bills when not covered by the NHS.
- Pay for big-ticket items
Home equity could be used to purchase big-ticket items that would be unaffordable through other credit sources. For example, the money might be used to buy a round-the-world trip, a boat, car, or even fund a new business investment.
- Help family members
Older generations have been known to take out some home equity to help out struggling family members who may have gotten themselves into debt. Or they may do it to help their family get on the property ladder, which is proving more difficult for the younger generations.
Can I use a home equity loan to buy a car?
You might want to use a home equity loan to buy a new car. If the interest rate offered to you within a home equity loan is lower than the interest rate on car financing options, you could save money by using your home equity instead. However, you’ll need to consider any home equity loan closing fees too.
Home equity loans FAQs and answers!
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