An introduction to homeowner loans: the key to cash
in your house
These days it’s difficult to get by without some form of financial
assistance – most of us have loans, mortgages, credit cards, store
cards or other types of debt. Taking out a personal loan is one of
the most common and convenient ways in which to borrow money. There
are two main types – unsecured or secured. Unsecured loans are loans
without any form of security tied to them as a guarantee of repayment,
whereas secured loans are guaranteed by some form of security to safeguard
the lender in case of non repayment. Normally the security used in
such loans is your house – whether you own it outright or have a mortgage
on it. (Loans secured against a house that already has a mortgage
tied to it are known as second charges, and loans secured against
a house that is fully owned are known as first charges.)
Homeowners therefore have a real advantage when it comes to borrowing
money, as owning property provides great potential for freeing up
capital for personal use. Homeowner loans, as they are often known,
allow you to use the equity available in your house to borrow money.
(Equity means the value of your home minus any outstanding debts secured
on it, such as a mortgage.) They have many benefits:
Equity is the key to unlocking large sums of cash from the value of
your property. Homeowner loans allow a much higher amount of lending
over a longer period than unsecured loans, as they are guaranteed
against the value of your property and are therefore considered less
of a risk to the lender than an unsecured loan. Even if you have negative
equity (i.e. your mortgage or debt is higher than the value of your
home) it’s often possible to get a homeowner loan, as many lenders
will lend up to 120% of the value of the property.
For the same reason, homeowner loans tend to have a lower rate of
interest than unsecured loans. This means lower, more affordable monthly
repayments than an unsecured loan.
As with any other personal loan, the money is yours to spend in whichever
way you want. You might want to make some home improvements, purchase
land, use the capital to start up a business, buy a car, go on holiday
or consolidate debts or loans.
Some people have problems, often because of poor credit history. However,
as homeowner loans are secured and provide a guarantee to the lender,
people who have previously been unable to qualify for an unsecured
home loan often find it much easier to get a secured loan, thereby
giving them access to borrowing that they could not otherwise have
obtained.
Homeowner loans can also be as flexible as you want them to be. At
the outset you’ll discuss and agree with the lender what terms and
conditions best suit your needs. Typical repayment terms may be anything
from three to 25 years, normally paid in monthly instalments, and
loan amounts tend to range from £2,000 to £60,000. Interest will be
charged on the amount that you borrow, which is known as the APR or
annual percentage rate. The specific details of your loan – the amount,
interest rate and repayment term – will be calculated based on the
equity available in your property (which will need to be valued),
your personal financial status and credit history and the lender’s
confidence in your ability to repay.
Research the cost of your loan carefully before you sign up to anything.
As with any other purchase, it’s essential to do a bit of research
and shop around until you get the best deal. You may find that the
interest rates seem to vary considerably from lender to lender. However,
beware of how the APR is advertised – different companies calculate
their APR in different ways, and often display their monthly rates
more prominently than the APR, so it’s not always easy to compare.
(Monthly rates can be cheaper than the APR, which is very misleading.)
For each product, find out what the APR is and how it is calculated
so that you understand exactly how much the monthly repayments will
be and how much you’ll be repaying in total. This will enable you
to compare like for like between products.
Charges and penalties can make a big difference to the cost of the
loan. Many policies penalise early repayment, and others contain hidden
fees and charges. Always read the small print and ensure that you
understand the terms and conditions exactly. Ask the lender to explain
any areas that you’re unsure about before you commit to anything.
Another useful tip to bear in mind is that the shorter the repayment
term, the less interest you’ll be paying and therefore the lower the
total cost will be to you. It’s therefore best to find the shortest
term that you can manage.
Remember that it’s not just traditional banks, building societies
and mortgage lenders who sell financial products. Nowadays there are
many other types of lender in the market providing competitive deals
at competitive prices. You’ll probably find that supermarkets and
online providers offer the best value for money.
Most importantly, weigh the risks and benefits of using your home
as security for a loan to ensure it’s the right thing for you. On
the whole, homeowner loans offer much better value for money than
unsecured loans and are very convenient for people who are unable
to qualify for an unsecured loan. However, before you proceed, you
should analyse your personal finances, work out your budget and be
confident that you’ll be able to keep up the repayments, otherwise
you could end up losing your home.
Your property is the key to when you’ve considered all these important
factors relating to homeowner loans and looked around for a suitable
product, you can be sure that you’ll be getting a better deal with
a homeowner loan than you would be with an unsecured personal loanraising
the cash you need in an affordable way.
Author: Benedict Rohan
Recomeded reading: How
to Get the Best Home Loan, 2nd Edition
* Understand why lenders do the things they do * Learn what to look
for when comparing loans and lenders * Head off potential problems
and expensive mistakes * Navigate FRMs, ARMs, FHAs, GEMs, and TILs
* Know why certain loans may be better for you than others * Save
yourself hundreds, even thousands, of dollars
