Home equity is the current market value of a property available to the owner after taking into account any outstanding loans. This equity can be realised by taking a loan against the property, which can be used for generating funds at a lower cost since the property will be provided as security for the loan. The term of the loan can be as long as 15 years, which makes repayment easier. Such loans are offered by most banks, NBFCs and housing finance companies. Such a loan is typically available against residential and non-residential property. The lender may impose other conditions and requirements, such as the property being fully constructed or a minimum market value. The borrower must have clear title to the property being offered as security.
Application: The owners of the property have to be co-applicants for the loan, but all co-applicants need not be owners. The processing fee needs to be paid at the time of submission of the loan application, which is usually a percentage of the loan amount.
Eligibility: While sanctioning the loan, the applicant's source of income and existing loans, credit score or repayment track record, and the value of the property are considered. The lender may have additional parameters concerning age and income.
Disbursement: The lender carries out credit, technical and legal appraisal of the property before sanctioning and disbursing the loan. The loan agreement and other documents need to be executed.
Repayment: The repayment is done through EMIs over the period of the loan. One can also make a part payment or prepayment of the principal during the loan period to reduce the EMI or tenure.
Points to note
1) The lender does not specify or monitor the use of funds and, typically, excludes the funds from being used for illegal purposes.
2) It is a good idea to insure the property in order to provide for any unforeseen events.
3) There are no tax benefits available on repayment of the loan and the inability to repay may imply that the lending institution can take possession of the property.