COVID-19 has transformed social and professional lifestyle. Most of us are working out of our homes, with little hopes of returning to the office anytime soon. Working from home is convenient because it saves us the cost of commuting to work, but it isn’t always easy. If you live with your family, finding yourself a peaceful corner can be a bit of a challenge.
Are you planning to turn the old attic into an in-house workstation, or perhaps adding an edgy patio to relax after a hectic day at work? Such expenses require you to shell out a massive chunk from your savings. While a typical loan can help you get through a basic financial crunch, it may not be the best option for more significant ventures.
A homeowner loan allows you to borrow a sizeable amount of money at lower interest rates. But how can you qualify? And, what for can you use a homeowner loan? Read on to find out.
What is a homeowner loan?
A homeowner loan is a type of secured loan that enables you to borrow money against the equity you hold in a property. You essentially leverage your share of equity in your home to borrow a considerable amount of money.
Home equity loans and HELOC are two of the most popularly used homeowner loans. Herein, you secure your share in the property as collateral against the loan. With home equity loans, you can borrow a substantial sum of money based on your equity in a property. HELOC or Home Equity Line of Credit is a type of revolving credit wherein a lender evaluates your equity and set a borrowing limit. You can borrow this money at your discretion. In the case of HELOC, you’ll only have to pay interest for the amount that you borrow.
Homeowner loans are ideal for costly expenses when you need to borrow a more considerable amount at lower interest rates. However, there are several risks associated with this type of credit. By securing your share in the property as collateral, you may put your property at risk. If you fail to repay the loan, the lender can repossess and sell your house to recuperate their loss.
To qualify for a homeowner loan, you must either be the complete owner of your home or hold some equity in the property. Your equity in a property can be defined as the value of your share in the mortgaged property. Mathematically, home equity is the difference between the market value of your property and the amount you owe towards the mortgage. Take a look at the following example:
Say you’ve recently invested in a property worth £300,000, wherein you’ve paid 30% (£90,000) in down payment. Now, you mortgage the property to pay the remaining £210,000. So, your equity in the property is £90,000.
What to consider when borrowing my first homeowner loan?
Pros
- Since the loan is secured against your property, the interest rates for homeowner loans are lower than unsecured loans and credit cards.
- Fixed monthly payments allow you to plan and budget accordingly.
- Homeowner loans primarily rely on home equity, making them more accessible to people with a low credit score.
Cons
- Your home may be at the risk of repossession if you fail to keep up with repayments.
- Homeowner loans with variable interest rates are subject to change as per market fluctuations. In case the rates increase, you may end up paying a greater interest.
- If you use a sizeable homeowner loan to consolidate your debts, you may end up paying more in interest over the loan’s term.
How much can I borrow through a homeowner loan for bad credit?
How much you can borrow with a homeowner loan depends on the following factors:
- The market or appraised value of your property
- Loan-To-Value (LTV) percentage
- Equity share
- Credit history and credit score
- Income
- Desired loan term
- Age
Lenders usually set standard criteria for the maximum LTV. The market value of your property helps lenders decide how much they want to lend. Consider the example below:
If you own a property worth £300,000 and wish to borrow £120,000, your LTV would be 40%.
However, if you’re paying towards an existing mortgage, subtract the outstanding balance from the mortgage amount to obtain the effective LTV. Let’s take another look at the previous example.
Your property is worth £300,000, and your mortgage balance is £50,000, which leaves you with £250,000. Now, if you wish to borrow £120,000, your LTV will roughly be 48%.
The lower the LTV, the higher are your chances of securing a homeowner loan at low-interest rates and competitive terms.
What for can I use a homeowner loan?
Homeowner loans are a great way to borrow more sizeable loans. You could be planning a refurbishment, scaling your property or investing in a new one; the list can go on. Most people borrow such an amount to fund a home improvement venture.
If you’ve been accumulating debt and now owe a massive sum of money, a homeowner loan could be helpful. You can organize and unclutter your finances by consolidating your debts at a lower interest rate using a homeowner loan. Do consider that this kind of credit can put your property at risk of repossession.
What if I want to move houses during a homeowner equity loan?
If you plan to move during the term of your loan, the following may be worth considering:
- Transferring the loan to a new property: Your lender may transfer your homeowner loan to the new property at an additional fee.
- Using the funds from the sale to pay the loan: The funds you receive after selling your old property can help you pay off the loan.
- Taking out a new loan to repay the original one: If you’re not left with enough money after selling your property, you may have to borrow money to repay the loan. But, it could impact your mortgage affordability.
Conclusion
Homeowner loans are a smart way to finance big-ticket ventures. Instead of breaking the bank by paying a hefty lump sum, you can split the cost over fixed monthly payments for a set period with a homeowner loan. However, it is essential to note the repayment implications since failure to cope with the instalments could cost you your home.