IF you’re already a homeowner, chances are that you have already started to explore ways in which you can utilise your asset to increase your wealth.

In the current market, you may find that it’s hard to get credit at reasonable interest rates. However, if you are a homeowner who’s strapped for cash, you stand a chance of getting the lowest rates on the market.

That’s because home equity loans have longer terms for repayment and lenders view this arrangement as highly secure.

Put simply, a home equity loan is a type of loan in which the borrowers use the equity of their home as collateral. The loan amount is determined by the value of the property and the value of the property is determined by an appraiser from the lending institution.

It is more attractive for some borrowers to take this route because home equity loans feature relatively lower interest rates and more predictable payments.

Miguel Beckford, branch manager, JMMB Bank – Fairview, told the Jamaica Observer, “You get lower interest rates and you can compare that to an unsecured loan at 16 per cent, car loan which can go up to maybe 10 per cent, a credit card that can go up to 51 per cent. You also have lower repayment amounts and this is due to the longer term that you get on a home equity [loan], which can go up to 15 years. So you could be borrowing the same amount of money in an unsecured loan and you end up paying half the amount monthly.”

But that’s not all, Beckford stressed. “It allows you to pay off higher interest credit which will result in your disposable income being higher. Even if you have other debt, like credit cards, other unsecured loans, and you’re paying money here and there, you probably sometimes have a little issue with remembering which loan you have outstanding. This now brings everything into one; the loan is now consolidated so you just pay one fixed payment over the period so it makes it that much easier.”

As a notable benefit, he disclosed that JMMB clients will not experience any additional penalty if they decide to pay off their home equity loan before it matures.

At the same time, however, there are a few challenges associated with the home equity loan.

For starters, you may have to spend a little bit more than you would if you took out a regular loan.

“You will have higher upfront costs. Any bank that you go to they’d want to know that you have a survey ID report showing that you are within your boundaries and that there’s no breaches on property, simple stuff like your garbage disposal is in the right place, all of those stuff; that’s a cost,” Beckford noted.

He further highlighted that “if you don’t have a recent valuation under a year, then you’re going to need to get a valuation report and that report sometimes can run you 0.2 to 0.3 per cent of the actual value”.

Aside from that, he noted that making home improvements to increase the value of the property can also be expensive.

“If you’re going to be doing additional work on the property you would need stuff like parish council approval, and those things come with a cost. There are also additional government charges such as registration of the mortgage and most banks require that you pay legal fees,” he continued.

Nevertheless, he said taking out a home equity loan could be a worthwhile decision.

“If you do a home equity loan it gives you a lot more room for investment. So, that additional money that you will have you can now take that and put it in an investment portfolio. You can start a different saving plan. It opens a whole different world for you,” Beckford stated.