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If you are in need of a loan, home equity can be an easy option. It is a loan against a property that can be residential or non-residential. Loans can be taken for needs like children's higher education, marriage, or other property purchase. In a home equity loan, the borrower uses the equity of his home as collateral.
Home equity loans are provided by public and private sector banks and also by housing finance companies. Banks usually give about 60 percent of the actual value of the property as a loan. However, the final sanction of such a loan and the amount to be disbursed depends on the policy of the lender property loan.
Home Loan Equity Accounting
Home equity loan eligibility is calculated on the basis of the current market value of the property at which the borrower pays the amount due it. The sanctioned amount will be the equity of the borrower. For banks, it is a secured loan as it gets the house as collateral.
The interest rate for a home equity loan is higher than for a plain-vanilla home loan. However, the rates are much lower as compared to other types of loans like personal loans or credit card loans. One can repay the amount in five years to 20 years, however, it is better to repay the loan earlier.
The installments on this loan are paid every month, on top of the monthly installment payments towards the already existing home loan. Unlike home loans that offer annual tax exemption of up to 2 lakhs on interest payment and up to 1.5 lakhs for principal repayment, home equity loans do not offer any tax benefits on repayment.
Factors Affecting Home Equity
Home equity varies from time to time depending on the real estate prices. Since the real estate market depends on the growth rate of the economy, demand and supply conditions, and prevailing interest rates, home equity varies accordingly. In the current situation, when home prices are stable and inventory increases, home equity will not improve, especially if the house is purchased in the last seven to ten years.
Location advantages such as schools, hospitals, industries, highways, and public transport facilities also help increase home equity. The owner should ensure that the house is in good condition and all fittings are in place. The investment made in home renovation helps to fetch higher value and increase the equity of the flat. Also, the owner has to ensure that all the bills including house tax are paid and that there is no dispute over the property.
loan terms
For home equity loans, banks can offer a lump sum amount where the borrower will get the entire loan amount in one lump sum. Another option is when the bank will sanction the loan by dividing it into parts based on the needs of the borrower.
The borrower will make a repayment every month. One can make partial repayment of the principal amount based on surplus liquidity. Banks do not charge a prepayment penalty on a floating loan and the minimum amount of prepayment is EMI for at least two months. A borrower should start paying some amount from the first year of the loan. Prepaying later does not save much in terms of interest payments.
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Carrying out the EMI helps in reducing property loan the overall interest rate over the long term. Increasing the EMI is an effective way to ensure that the loan is repaid early. An increase in EMI can be requested at any time during the course of the loan and there is no charge for such request. The borrower will have to give a fresh ECS mandate to the bank for the new EMI.
Documents needed for property loan
Both salaried and self-employed people can avail of home equity loans. Identity and residence proof to the borrower, six months salary slips for salaried individuals, balance sheet and profit and loss account for two years for self-employed individuals, income tax return for two years, bank statements for last six months and application letter have to be given.
For property, registration deed, completion certificate, occupancy certificate, building approval plan, appraisal report from bank's approved valued and latest property tax payment receipt has to be submitted along with application form and processing fee. Hence, getting a home equity loan can be beneficial for an individual due to its ease.