 |
  |
| Traditionally the homeowner mortgage was a thing that stood by itself, without added features or 'frills'. Investment loans, car loans and personal loans were separate mortgages independent of equity in the home. The homeowner met home-loan repayments from after tax income, and investment loan repayments from tenant rents. | |
| The traditional home loan took a long time to repay, often over twenty years. Further, homeowners might find themselves 'asset rich'; having repaid most of a loan on a home that had greatly increased in value, and yet be 'cash poor'. | |
| Today's lender has had to change to 'meet the market.' The phenomenal growth of mortgage originators has forced traditional banks to offer loans that include provisions for the range of financial and taxation needs of their customers. One of the major innovations in the past few years has been the Home Equity style loan. Put simply, this allows a second mortgage against the value, or equity, built up in your home. | |
| Home Equity Loans have already become almost the norm in the US. By one reckoning, 25% of the mature baby boomer generation currently has Home Equity style loans, as well as 19% of their children, Generation X (1998 National Housing Survey, Fannie Mae). | |
| Home Equity Loans can be used to consolidate debt, including credit card debt. The danger with this is it can too easily become another credit card style debt, as in a Line of Credit Loan that gives ready access to cash. However a Home Equity Loan can also be used to tap the equity value in the residential home to make more productive investments in property or the stock market. All this is made possible because of the steady growth in equity built up in the home. Many will have found that since purchase their home has appreciated in value. Others have gradually built up considerable equity in their home by the principal portion of each loan repayment. | |
| Lenders are now offering a variety of loans which meet the need to release equity value. These can be grouped into three broad classes of loan. | |
| Firstly, there is the basic Home Equity loan. Here you get cash in one lump sum, and start paying interest on it from day one. The upside of this is that you may get sufficient cash for that large project or productive investment. It would otherwise be very difficult to save such an amount from your after tax earnings. The downside is that you will be paying interest on this straight away. It is essentially an additional mortgage which will typically allow you to access 80% of your home's value, or less in rural areas. | |
| The second newer type of loan is a Line of Credit. Here you only pay interest on the amount of money that you have withdrawn. The downside of this is that you will need to be disciplined to avoid using up all the equity in your home for consumption expenditure. | |
| The third option is to refinance your existing mortgage. If you want to take cash out when you refinance, lenders will typically provide around 80% of your home's current market value. The positive here is that you'll have only one mortgage payment with probably lower interest rates. However, if you need to refinance for more than 80%, you will need to get an Equity loan on top of your home loan, and you would be better placed getting just the one Equity style loan, to avoid duplication of charges. One suggestion, instead of a refinancing, is to look closely at your lending terms, or to ask your lender, to see if you may be able to obtain some of the new terms you want by agreeing to a modification of your existing loan. | |
|
|
ABOUT US | CONTACT US | ADVERTISE | DIRECTORY LISTING