What are Home Equity Loans in the UAE?
Second mortgages or home equity loans are types of home loans wherein homeowners can borrow funds by putting up the equity in their homes as leverage. They are among the easiest sources of cash a customer could wish for as the rate of interest on second mortgages is relatively low in comparison with consumer loans and credit cards, but still slightly higher than a first mortgage. There are two kinds of home equity loans – Fixed-rate loans and home-equity lines of credit.
Kinds of Home Equity Loans
Fixed Rate Loans: Borrowers receive one lump sum amount in this kind of home equity loan, and the loan can be repaid over a specified time at a rate of interest predetermined by the lender. The rate of interest and the payment amount remains consistent during the course of the loan.
Home-Equity Lines of Credit: This kind of home equity loan works in a similar fashion to a credit card. There are times when customers also receive a credit card along with the loan facility. The customers will be assigned a particular spending limit, allowing them to withdraw funds whenever required using special checks or credit cards. The monthly payments differ depending upon the borrowed amount and the prevailing rate of interest. Similar to fixed rate loans, the term in a home-equity line of credit is predetermined by the lender.
Advantages of Home Equity Loans to customers
Apart from providing customers with a simple source of cash, home equity loans are sanctioned at rates of interest that are considerably low when compared with other consumer loans and credit cards. As a result, the primary reason why customers take out home equity loans against the equity in their homes is to make repayments on overdue credit card balances. Even the rate of interest paid on home equity loans are tax deductible, offering additional benefits to customers.
Advantages of Home Equity Loans to lenders
Lenders benefit from home equity loans by way of fees and interest in addition to earning fees and interest on the first mortgage taken out by the customer. In case there is a default on the customer’s part, the money made on the first mortgage as well as the money made on the home equity loan will go straight to the bank. Moreover, the lender can also repossess the home and re-sell it.
How to make best use of home equity loans?
A home equity loan is among the greatest tools a responsible customer could avail. If the customer has a reliable and steady source of income along with the assurance to make repayments on time, the tax deductibility and low rate of interest make it a great solution.