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All about home equity

In all probability, your home is your single most valuable asset. But what is the market value (equity) of your house and how can you encash it to fulfil your financial needs? Read on to find out.

Print Edition: Nov 29, 2007

In all probability, your home is your single most valuable asset. But what is the market value (equity) of your house and how can you encash it to fulfil your financial needs? Read on to find out.

Your home equity is the difference between what you owe on your home loan and the present market value of your house. Assume you buy a house for Rs 50 lakh for which you make a down payment of Rs 10 lakh and take a loan of Rs 40 lakh. The equity on your house is 20% or Rs 10 lakh (Rs 10 lakh as a percentage of the market value of your house i.e. Rs 50 lakh).

CHANGES IN HOME EQUITY

Home equity increases in the same proportion as you repay your home loan. If property prices fall, it will reduce your home equity. If you don’t want that to happen, prepay higher amounts of loan to keep the home equity from falling. Of course, rising real estate prices will always increase your home equity, as will any value additions you do to the house.

UNLOCKING HOME EQUITY

So, how do you put that home equity to use? Can you convert it into cash? You can get a home equity loan from banks based on your track record of home loan payments. The loan becomes a second mortgage and you have the option of clubbing it with the tenure of your home loan or repaying it separately. The amount of home equity loan is up to 65% of the current value of your house with a tenure of up to 15 years.

HOME EQUITY LOAN

What for: Multipurpose (education, marriage, medical expenses, business costs)

Tenure: Up to 15 years

Interest rate: 12.5-13.25%

Amount: Depends on the current property value

And always remember...

  • Home equity loans are cheaper than personal loans
  • You can use the loan amount for any purpose
  • Use this loan to consolidate and retire high-cost debt

THE THREE LEVERS OF LOAN

1. CASH

Banks require borrowers to prove that they have enough cash to cover the down payment (usually 15%-20%), fees and charges like stamp duty. You will need to provide:

  • Bank statement (last six months)
  • Proof of sources of income

The bank will verify your current and average balance over the last six months.

2. INCOME

You will need to prove your ability to repay what you borrow by providing the bank with your salary slip of the last three to six months (if you have been employed in the same company for more than a year) and a copy of Form 16.

The bank may ask for an appointment letter or an endorsement letter from your employer if you have been in the current job for less than a year. You can club the income of your spouse or parents in case the property is in a joint name.

3. CREDIT HISTORY

If you have already taken any other loan, a good payment track record is a plus point. When considering your eligibility, banks will consider all the other liabilities and loans that you might be paying.

And always remember...

  • Unless it’s an emergency, do not over-leverage your house
  • Ideally, do not club the EMI repayment of your home loan and home equity loan
  • Some banks insist on knowing the end use of a home equity loan, especially if you take a second mortgage in less than three years

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