Should you opt for a fixed-rate home equity loan or a HELOC? Know here!

Home equity loans can always be used when faced with financial storms that threaten your business. You can get such loans up to Rs 7 crores from a lender, no matter if you are salaried, self-employed, an individual or part of a business. Get 80% funding against your property's value as collateral, and sail smoothly through rough waters with a home equity loan.

What are home equity loans?
 

Home equity loans belong to the realm of 'consumer debt,' empowering homeowners to access loans using their property's equity as collateral. In India, a home equity loan spans 15 years and generally boasts a lower interest rate than personal loans. The loan amount depends on the gap between the owner's outstanding mortgage balance and the property's current market value. Home equity loans are available for both residential and non-residential properties. It's wise to maintain a stellar credit history before applying for a home equity loan. It is advisable to have a good credit history before applying for a home equity loan.

Types of home equity loans
 

Two broad categories of home equity loans are identified – Fixed-rate home equity loans and HELOC (Home Equity Lines of Credit). Let us understand these two types in further detail:

1. Fixed-rate home equity loans
 

Fixed-rate home equity loans provide a lump sum to the borrower. As with any other loan, the amount must be repaid to the lending bank with interest. Kindly note that the interest rate of a fixed-rate home equity loan does not change depending on market conditions and remains the same throughout the lifetime of the loan.

2. Home Equity Lines of Credit (HELOC)
 

The major difference between fixed-rate home equity loans and HELOC is that the latter is not a lump sum of money given to the borrower. A home equity line of credit works as a credit card that can be repeatedly used and repaid in monthly repayments. A HELOC is a secured loan for which the security is the borrower’s pledged property. Borrowers are also offered HELOCs as bundled packages with a credit card. This allows them to withdraw from the loan afforded to them through cheques.

Key differences between home equity loans and HELOCs
 

Here are the major differences between home equity loans and HELOCs:

• Interest rates: The interest rate is fixed for a fixed-rate home equity loan whereas it is variable for a HELOC.
• Credit: The mode of providing credit to the customer forms another major difference between the two types of home equity loans. Fixed-rate home equity loans offer a lump sum to the customer at the beginning. On the other hand, HELOCs offer a line of credit to the customer.
• Mode of repayment: Fixed-rate home equity loans can be repaid through fixed monthly payments, whereas HELOC repayment amounts change over time.
• Repayment term: The repayment term of a fixed-rate home equity loan starts as soon as the lump sum is disbursed. In the case of a HELOC, repayment is limited to interest during the term of the loan. The principal repayment begins as the repayment phase starts.
• Who must opt: If you require lump sum capital urgently (for starting a business, for example), you must choose a fixed-rate home equity loan. Conversely, if you need cash periodically over a period (for example, for managing your business during an emergency), you must opt for a HELOC.

Understanding Home Equity calculation
 

Whether you opt for a HELOC or a fixed-rate home equity loan, your loan amount will be determined by the amount of equity in your home. Here is the formula to calculate the equity of your property in India:

Equity = Current value of the house – the total outstanding amount payable towards the loan

Let us understand this calculation through an example. If you bought your house at ₹60 lakhs and took a loan worth ₹50 lakhs, the current equity of your house will be ₹10 lakhs. Let us assume that as the years passed, your house value increased to 70 lakhs. You have repaid ₹25 lakhs of the outstanding loan amount. Therefore, your house's equity will increase to:

Equity = ₹75 lakhs - ₹ 25lakhs = ₹50 lakhs

This shows us that the value of house equity is subject to change. Since the loan amount of a home equity loan is decided based on the equity, the loan amount afforded to you could vary depending on when you avail the loan.

To learn more about IDFC FIRST Bank loans against property, visit the site mentioned at the beginning of the article. Be sure to use IDFC FIRST Bank’s loan against property EMI calculator before applying.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.