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An Introduction To Homeowner Loans: The Key To Cash In Your House
By Benedict Rohan
These days itís difficult to get by without some form of financial assistance Ė most of us have loans, mortgages, credit cards, store cards or other types of debt. Taking out a personal loan is one of the most common and convenient ways in which to borrow money. There are two main types Ė unsecured or secured. Unsecured loans are loans without any form of security tied to them as a guarantee of repayment, whereas secured loans are guaranteed by some form of security to safeguard the lender in case of non repayment. Normally the security used in such loans is your house Ė whether you own it outright or have a mortgage on it. (Loans secured against a house that already has a mortgage tied to it are known as second charges, and loans secured against a house that is fully owned are known as first charges.)

Homeowners therefore have a real advantage when it comes to borrowing money, as owning property provides great potential for freeing up capital for personal use. Homeowner loans, as they are often known, allow you to use the equity available in your house to borrow money. (Equity means the value of your home minus any outstanding debts secured on it, such as a mortgage.) They have many benefits:

Equity is the key to unlocking large sums of cash from the value of your property. Homeowner loans allow a much higher amount of lending over a longer period than unsecured loans, as they are guaranteed against the value of your property and are therefore considered less of a risk to the lender than an unsecured loan. Even if you have negative equity (i.e. your mortgage or debt is higher than the value of your home) itís often possible to get a homeowner loan, as many lenders will lend up to 120% of the value of the property.

For the same reason, homeowner loans tend to have a lower rate of interest than unsecured loans. This means lower, more affordable monthly repayments than an unsecured loan.

As with any other personal loan, the money is yours to spend in whichever way you want. You might want to make some home improvements, purchase land, use the capital to start up a business, buy a car, go on holiday or consolidate debts or loans.

Some people have problems, often because of poor credit history. However, as homeowner loans are secured and provide a guarantee to the lender, people who have previously been unable to qualify for an

often find it much easier to get a secured loan, thereby giving them access to borrowing that they could not otherwise have obtained.
Homeowner loans can also be as flexible as you want them to be. At the outset youíll discuss and agree with the lender what terms and conditions best suit your needs. Typical repayment terms may be anything from three to 25 years, normally paid in monthly instalments, and loan amounts tend to range from £2,000 to £60,000. Interest will be charged on the amount that you borrow, which is known as the APR or annual percentage rate. The specific details of your loan Ė the amount, interest rate and repayment term Ė will be calculated based on the equity available in your property (which will need to be valued), your personal financial status and credit history and the lenderís confidence in your ability to repay.

Research the cost of your loan carefully before you sign up to anything. As with any other purchase, itís essential to do a bit of research and shop around until you get the best deal. You may find that the interest rates seem to vary considerably from lender to lender. However, beware of how the APR is advertised Ė different companies calculate their APR in different ways, and often display their monthly rates more prominently than the APR, so itís not always easy to compare. (Monthly rates can be cheaper than the APR, which is very misleading.) For each product, find out what


 

the APR is and how it is calculated so that you understand exactly how much the monthly repayments will be and how much youíll be repaying in total. This will enable you to compare like for like between products.

Charges and penalties can make a big difference to the cost of the loan. Many policies penalise early repayment, and others contain hidden fees and charges. Always read the small print and ensure that you understand the terms and conditions exactly. Ask the lender to explain any areas that youíre unsure about before you commit to anything.

Another useful tip to bear in mind is that the shorter the repayment term, the less interest youíll be paying and therefore the lower the total cost will be to you. Itís therefore best to find the shortest term that you can manage.

Remember that itís not just traditional banks, building societies and mortgage lenders who sell financial products. Nowadays there are many other types of lender in the market providing competitive deals at competitive prices. Youíll probably find that supermarkets and online providers offer the best value for money.

Most importantly, weigh up the risks and benefits of using your home as security for a loan to ensure itís the right thing for you. On the whole, homeowner loans offer much better value for money than unsecured loans and are very convenient for people who are unable to qualify for an unsecured loan. However, before you proceed, you should analyse your personal finances, work out your budget and be confident that youíll be able to keep up the repayments, otherwise you could end up losing your home.

Ė your property is the key to When youíve considered all these important factors relating to homeowner loans and looked around for a suitable product, you can be sure that youíll be getting a better deal with a homeowner loan than you would be with an unsecured personal loanraising the cash you need in an affordable way.

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This page was updated on Nov 2009 and is Copyright © 2003 by Global Com Consulting Inc.