Many people get confused between the different types of home loans, and how they work. When it comes to having a home loan, you might have been offered an equity home loan. How does this work and is it the same as refinancing? We break it down for you so you can make the right decision that satisfies your needs.
What is an Equity Home Loan?
When you purchase a home and don’t have the cash for it, you’ll apply for a home loan. You’ll pay this off over several years. During this time, housing prices will naturally increase, and your home will eventually become worth more (hopefully). This is seen as a sort of savings and can be borrowed against. For example, if your home is valued at $300 000, and you have paid off half, your home’s equity is $150 000. This is what you can borrow against.
These days, it’s generally referred to as a 2nd mortgage, and is becoming increasingly uncommon. Whenever you take any mortgage out against your property, the bank lists a controlling interest over that property with the lands and titles office e.g. the property cannot be sold or change ownership without the bank’s authorization or the mortgage being repaid in full.
Banks are increasingly moving away from 2nd mortgages because if you imagine a situation where a client has filed for bankruptcy, there are 2 x banks with mortgages listed against the property, who then have to fight for their money to be returned after the property is liquidated, and some fairly exorbitant fees are removed from what is left over. The emerging trend in lending is to refinance/consolidate all of the debt, and have one mortgage registered. You will also find that 2nd mortgages are at much higher rates and fees than a 1st mortgage or refinance.
How Does A Home Equity Loan Work?
The main requirement for a home equity loan or second mortgage is that you use your house as collateral. This means that the lender can take your home away should you default on your home equity loan. You can get access to a large amount of cash, all in one go, but the pitfalls can outweigh the benefits unless you’re careful.
Depending on your situation, different options might be best for your needs. Do your research and speak to an expert before you commit to anything. For an expert, look no further. Ben at Black Box Finance can provide you with all the information, guidance and support you need for your Home Loan and/or Refinancing journey.
Call 1300 70 12 17, submit an enquiry in the contact us section below or email us at [email protected]. Your trusted mortgage broker for Burleigh, Palm Beach, Currumbin and all the beautiful surrounding areas.