A home equity loan is a type of loan in which the borrower uses the equity of his or her home as collateral. Collateral real estate can be represented by the apartment, room, house, office or warehouse.
To provide a home equity loan, bank employees must be confident in the possibility of easily, quickly and expensively selling an apartment or any other real estate object acting as collateral. To be sure, banks resort to the help of specialists from law firms. These are professional appraisers whose responsibility is to determine the market value of the property on the date of conclusion of the contract.
The size of the loan secured by real estate depends on the amount that can actually be earned for property acting as security for liabilities.
What real estate can I use?
Almost any property which you own is suitable for collateral. The bank may be interested in:
- a flat;
- a cottage;
- a townhouse;
- a car;
- a garage with land and so on.
Be prepared for the fact that the property will have to be officially evaluated.
As a rule, banks do not provide loans in excess of 60% of the appraised value – this is important to consider when applying. But there are exceptions. In any case, if you do not need a strictly defined amount, you’d better play it safe and ask for less than half the cost: the probability of approval will immediately increase.
Cost of collateral
The value of collateral is determined by the following factors:
- The date of construction of the house. Keep in mind: the newer the building, the better. If the apartment is located in a very old house, then you should not even dream of an impressive amount;
- Floor. The location of the apartment on the first or last floor can complicate obtaining a loan secured by real estate;
- Total and living area;
- Layout;
- The number of owners of the property. In this case, the larger your share in the apartment, the better, but if you own only one room and half of the kitchen, then they are unlikely to become the basis for a loan.
Before applying to a particular bank for a loan, find out information about the required package of documents. In any case, you will need to present the borrower’s ID and documents relating to ownership of the real estate.
Borrower requirements
Banks have certain requirements for the borrower and the subject of collateral. To get a loan, you need to match them. Some banks are stricter, while others are softer. Various microfinance organizations and credit brokers declare lower requirements and a simplified procedure for obtaining a loan. But then be prepared for a not very friendly interest rate and various tricks in the loan agreement. So what are the requirements of banks to the borrower and his or her property?
An unconditional requirement is the availability of property rights to real estate provided as collateral. Another main requirement is registration in the registration in the country. The age requirements for the borrower are as follows: the minimum age is usually 21 years, the maximum – between 65-75 years. Some banks impose restrictions on work experience over the past few years and work experience at the borrower’s last place of work. In addition, there are restrictions on the type of borrower’s activity. An obstacle to obtaining a loan may be for example the fact that the borrower or co-borrower are individual entrepreneurs, owners or responsible persons of a small enterprise. In many banks, however, there is no such restriction in this type of loan.
What is the price of loans secured by real estate?
A person taking a home equity loan can get the amount of up to 80% of the apartment cost.
For example, the owner of a small apartment, which is valued at $200,000, can count on a loan of $150,000 (75% of the appraised value).
Some banks impose restrictions on the loan size (in most cases they range from $200,000 to $300,000), but this is not a common rule.
The monthly loan installments will be quite tangible for the entire duration of the repayments.
For example, if you take $150,000 for a 20-year period at a rate of 14%, then you will have to pay almost $2000 each month.
The signing of a loan agreement should be carried out in the presence of the borrower, a bank representative, and a notary. The obligation of the latter is to confirm the validity of the document.
Advantages of a home equity loan
- The possibility of getting a loan without guarantors;
- Rates for such loans are much lower than those for unsecured ones: about 15-20% per annum versus 25-50%, and the loan term is longer (up to 7-15 years).
- It is not necessary for the borrower to provide a statement of income since collateral is considered to be his or her capital;
- The borrower is not obliged to provide a report on where the money was spent – this is a pretty weighty argument since most loans issued by banks are accountable;
- After obtaining a loan, the borrower remains the full owner of the mortgaged property, he or she can live or work in the premises of the object. But mortgaged property cannot be sold.
Disadvantages of a home equity loan
- Serious risk of losing property in the case the loan agreement terms have been violated;
- Often, banks include many additional clauses in an agreement to reduce risks and protect their activities from unscrupulous borrowers. Therefore, you should carefully read the contents of the contract. For example, the contract often contains a clause that provides for the termination of the contract unilaterally at the slightest violation by the borrower. In such a case, the bank reserves the right to demand early fulfillment of monetary obligations.
One can observe situations of this kind: customers take loans secured by their current housing and purchase an apartment in a house under construction. After the construction of the house, the apartment grows significantly in price and, by selling housing in a new building, the borrower not only repays the loan but also receives a pretty good amount. But there is a certain risk associated with the general situation in the housing market. If the transaction is successful, then the borrower will receive big dividends, in the other case, his or her financial situation will collapse.
Requirements for a home equity loan
- Certain requirements are also imposed on the subject of collateral. The main thing that the bank is interested in is your real estate should be liquid and guaranteed to be sold at a price not lower than the size of the loan issued. Still, of course, there should be a certain guarantee that during the period of the collateral the given property will not be demolished or destroyed by the elements. Therefore, a wooden house will not be accepted for collateral. The deplorable state of the property or poor location can also cause a refusal to issue a loan;
- Difficulties may also arise when pledging apartments with redevelopment. But options are possible. What does not suit one bank may be perfect for another. Most likely, you will be asked to legalize the redevelopment;
- Another significant reason for refusal is the presence of underage property owners. Indeed, in this case, it will be extremely difficult for the bank to sell the property, and sometimes it is simply impossible. Well, of course, the borrower’s right to real estate should not be restricted in any way, that is, real estate should not be encumbered, including – be the subject of litigation.
Things to pay attention to in the contract
Before signing, be sure to study the contract! Inattention can subsequently be expensive. Carefully re-read the sections “Obligations of the borrower” and “Bank Rights”. The first one may contain such unpleasant things for you as a ban on registration in a mortgaged apartment. Until you repay the loan, the bank will be your close relative. And if it is enough to notify the bank of a change in marital status, then repairs or redevelopment will have to be coordinated. Violation of these conditions may lead to penalties or even termination of the contract requiring early loan repayment.
The “Bank rights” may include the right of a bank to unilaterally change the interest rate, or something else related to payments. Of course, you’d better not sign such an agreement. In addition, the bank may try to impose a disadvantageous insurer on you, so insurance issues should be worked out in advance.
But the most amazing thing is that many banks charge a fee or penalties for early loan repayment or even generally prohibit it. The commission may be taken for the loan issuance. He bank may also charge fees for opening and maintaining an account, for the services of a notary public, appraiser and so on.
And one more important thing: carefully study what fines and penalties can be caused by late loan repayment. And it is very important that the contract contains no phrase about a possible pre-trial seizure of the collateral subject in case of a loan repayment delay. This means that you can be evicted from your apartment without trial.
So, collateral is a good way to get a larger loan and on more favorable terms. In addition, mortgaging your own apartment or car is sometimes much easier than finding several guarantors. However, be prepared for the fact that collateral will impose a number of restrictions on the use of your property, and if the loan is not serviced and repaid on time, you can completely lose your property. This issue should be taken very seriously.