Difference between home equity loans and home loans

What is a home equity loan? A home equity loan is a loan against residential property and is designed to meet the financial needs of a person who already owns a house, which is free from any encumbrance. The loan amount is given against existing property and as a customer you can utilise these funds to meet any requirements. However, you need to give a declaration that these funds will not be used to carry out any illegal activities or for any speculative purposes. A home equity loan differs from a normal home loan in a number of ways. A normal home loan is given for the purchase of a property while a home equity loan is given against an existing property of the customer.

In a normal home loan, the end use of the loan amount is monitored to ensure that the loan is actually used to pay the seller for the property. In a home equity loan, the end use is not monitored and you can utilise these funds to meet any requirements. Since the end use of the funds is not monitored the risk faced by the bank is higher. Accordingly, the rate of interest on a home equity loan is more. Another difference is in the value of property. In a home loan, the agreement value of the property is considered as a benchmark for arriving at loan amount. In a home equity loan, the property is valued by an approved valuator. The loan is based on current market value. Typically, the maximum loan will not exceed 50 percent of the market value as against 85 percent of the cost of property in home loans. This is subject to eligibility as per income norms, which are stricter in equity loans.

Also, home equity loans tend to be given either as an overdraft facility (which means it is for one year and renewed every year) or for a tenure of around five to 10 years.