The equity built on your home over a period of time, is undoubtedly the best advantage of owning a home in the Philippines. The quicker you build this equity by paying off your mortgage at the earliest, the finer monetary state you will be in. Equity on your assets is the most powerful tool to help manage finances.
When you buy a house, most of the payments you make in the initial years of the loan tenor, slips away towards the interest that the bank accrues on the loan rather than actually repaying the principal amount. The higher you owe on the loan/mortgage, higher is the interest you end up paying. Try to increase the EMI amount that you have to pay - this will cover the principal amount and have lesser interest charged on your payments. It has been observed that making just one extra mortgage payment on a yearly or half-yearly basis can help you close your loan many years ahead of the tenor.
Line of credit in home equity, refers to a kind of revolving credit system wherein your home acts as a collateral. It’s almost like a credit card. With this equity line, you become eligible for a pre-approved amount of credit and this specific amount represents the maximum limit that you can borrow at any given point in time based on the collateral offered. Based on the amount that is approved for your collateral, you repay a variable rate of interest along with a minimum payment that is due every month. This is calculated based on the loan that you have availed on the credit line.
You can borrow the maximum amount on your credit limit at any given point in time once your plan on the home equity is approved. You can also draw checks on your line of credit. Most often, you have a particular fee and charge for an application fee, property appraisal etc.
As a mandate, you have to pay off your home equity line completely when you put your home on sale. If the house will be on sale in the near future, you must consider paying off the upfront costs to set up an equity credit line. If you wish to lease out your home, this might get rejected or be prohibited under the conditions of the home equity agreement.
What is a home equity loan and how does it work?
Just like the home equity line of credit, there is a loan provided by banks and lenders and is called the home equity loan. Here again, your home acts as a collateral. Home equity loans are known to offer luring and attractive rates of interest as compared to unsecured loans. This is primarily because lenders consider a home as a very secure collateral as opposed to other forms of unsecured debts.
You can use a home equity loan to cater to specific expenses such as tuition expenses, medical expenses, expanding a business, buying a new car, a wedding or even a vacation. The idea is to be able to repay this amount in a really short period of time as compared to any other mortgage. If you have a loan on you and you are paying a high amount of interest for longer periods of time or have any kind of unsecured debt to clear, it will be a very wise move to transfer it to a home equity loan. With this you will be able to repay sooner as well as receive great advantages while filing for tax. All you have to keep in mind is that you are using your own shelter as a collateral and if you do not end up repaying the loan, you might lose out on your home.
In case the interest rates drop from the time you took the mortgage, consider this the best time to refinance your home. This means that you can go in for a new loan/mortgage with more affordable rates of interest. If you can manage to get yourself a deal that offers interest rates that is even 2% lesser than the older one, it is worth opting for. You could save a considerable amount of money depending on how much the bank charges and the time frame for which you want to stay in your home.
It’s not necessary to have the refinance take place with the same broker you used earlier. Look around and research for other options in the market and finally choose one that will be beneficial for you in the long run.
How will you know if you are actually saving money by refinancing your home?
To ensure that you are actually saving money, consider these costs before refinancing:
- Closing Costs on the mortgage - This cost needs to be incurred again when you choose to refinance your home. This might overshadow your savings you will receive from the new rates of interest considering how high the rates actually are. In such a scenario, it might not be worth refinancing your home.
- Penalties on prepayment of the already existing mortgage - Do check your agreement papers to be sure if a prepayment penalty on the loan exists or not. Again, if the prepayment charges are significantly high, then this too could overshadow all your savings from the refinancing.
Frequently Asked Questions on Home Equity Loan
- What collateral can I offer along with an application for a home equity loan?
Most often, the collateral that is accepted for a home equity loan is:
- A home and lot
- A lot
- A condominium
Yes. Borrowers of a home equity loan can repay over a maximum tenor of 180 months or 15 years.
Borrowers can enjoy up to 80% of the appraised value of the property being offered as collateral on the home equity loan.
The monthly amortizations on the home equity loan can be paid in 2 ways:
- Post dated checks in favor of the bank offering the loan
- Opening an account with the same bank for an ADA
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