What are Home Equity Loan?

Home equity loans are also known as equity release schemes. Home equity loans are aimed mainly at those UK homeowners that have paid their mortgages off. These people have at the moment got about £400 billion of value locked up in their properties. They can receive a cash lump sum or some income by unlocking that capital. However, before choosing this option, research them carefully, and make yourself aware of their possible disadvantages.

First, think about why you want to take out a home equity loan. Some people do it in order to finance some adaptations to their home, or to buy a new car. Some may use it to go on a holiday. Others may want to receive a regular income source so that they can pay for residential care, or just the cost of care.

However, these schemes are no longer the province of the over 60s. Nowadays, younger people can release money from the value of their property in order to pay for improvements to their home or their children's education needs.

Secondly, you should find out if you actually qualify for an equity release scheme. Do you completely own your property? Is your mortgage fully repaid? If not, then you will not qualify for a home equity loan from certain lenders. Others will not make this stipulation, but it is worth finding out so you do not waste time filling out failed applications.

There are three types of home equity release.

1. Home income plans generate a monthly income, from a loan usually invested in an annuity, which pays your income but also the loan interest. To guarantee your income you should choose a fixed interest rate. Bear in mind that you lose the money paid into an annuity when you die unless you take capital protection, which can refund some of the annuity. Home income plans are generally restricted to the over 75s.

2. Loans or Mortgages use the equity of your home to allow you to borrow a percentage of its value. You agree an interest rate on the loan and repay that over a period, and the loan is repaid when you sell the property, or by your next of kin should you die. You can do what you want with the money. Sometimes, you may get a roll up loan, where you don't even have to repay the interest, which is instead added to the loan you owe. This can build up very quickly, so be careful with it.

3. Home reversion is different from the above two, as you actually have to sell your home to receive the lump sum or the income. You then live in the property for a nominal rent. These schemes are a last resort, as you won't receive market value for your home.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2008

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