A home equity credit (mortgage) is a long-term loan provided by a bank secured by real estate.
All the conditions for the loan application and the features of loan agreements secured by a mortgage are regulated by the law on mortgages and the law on personal loans.
The total cost of a home equity credit is determined in accordance with consumer loan law. The total cost of a loan includes the amount of the principal debt; interest; other payments to the bank provided for by the agreement; payments in favor of third parties (if the borrower is obliged to pay them under the contract); insurance payments.
Assess the opportunities and risks
By purchasing an apartment with a home equity credit, the borrower becomes its owner. But his/her rights are limited since housing is mortgaged. The debtor has the right to register his/her family members in the purchased apartment, as well as to bequeath it.
However, the heir will receive not only an apartment but also promissory notes. By law, the bank can impose a foreclosure on the pledged apartment of the insolvent debtor, even if it is the only home.
All responsibility for the decision to use a home equity credit rests with the borrower, to repay the loan is his/her responsibility.
The borrower must assess his/her ability to repay the loan on a monthly basis throughout the entire (usually very long) term of the agreement.
It is necessary to form a financial reserve for emergencies (loss of work, illness, etc.) – not less than three months’ income, and also to evaluate ways to reduce possible risks (insurance, the availability of other assets for sale if necessary, etc.).
Carefully choose a bank and a loan offer
Banks are obliged to place all information about the conditions for getting, using and repaying a home equity credit, as well as a document describing the general terms.
It is necessary to check the availability of a banking license.
Find out the bank’s rating (preferably high). Read customer reviews on banking Internet portals and specialized sites.
Compare offers of several reliable banks by key parameters and choose the most profitable one, paying attention to the interest rate (it should not deviate too much from the average market level, too favorable conditions may imply additional costs and risks); the total cost of a home equity credit; the amount of overpayment; types and amounts of additional payments (assess the need for additional services and compare the associated costs).
Examine all the terms of a loan agreement before signing
When getting a home equity credit, we are actually talking about four separate transactions. They are interconnected and are formed in a complex manner in a certain sequence. As a rule, there is a separate agreement for each transaction.
The home equity credit agreement can be independent or act as part of the loan mortgage agreement. In any case, it must contain a description of the subject of the home equity credit; assessment of the subject of the mortgage; the deadline for fulfilling obligations; data on state registration of a mortgage.
State registration of a home equity credit is carried out on the basis of an application by the pledgor and the pledgee and the mortgage agreement.
Select insurance conditions
According to the law, the borrower is obliged to insure only the subject of the pledge (for an amount not less than the amount of the mortgage loan). But banks, as a rule, offer a comprehensive insurance contract for the following objects and risks: pledged property (risk of loss and damage to collateral); title (risk of loss of ownership of housing); the life and health of the borrower (risk of disability); the responsibility of the borrower (the risk of default on the loan in case of insufficient funds from the sale of the mortgaged apartment).
Insurance of additional risks is beneficial for the borrower since it protects him/her and his/her relatives.
According to the law on consumer protection, the borrower has the right to choose an insurance company on his/her own, and the bank in this case is obliged to provide him/her with a loan on the same conditions (if the selected insurance company meets the criteria of the bank).
The borrower has the right to refuse insurance (except for collateral insurance) before concluding a loan agreement without sanctions from the bank. In case of refusal, the loan rate may become higher.
Examine samples of all documents
The borrower has the right to demand preliminary examination samples of all documents on the transaction, which must be signed. Particular attention should be paid to the rules for using a mortgaged apartment and imposing a penalty on it.
Loan repayment rules
- Avoid delays;
- Monitor the status of the loan. It is advisable to connect SMS notifications;
- Provide the bank with up-to-date contact information;
- Do not stop paying off the loan in emergency situations, you must notify the bank in writing about problems with payment;
- When the loan is repaid – request a written document from the bank (certificate, statement of reconciliation of debt, etc.);
- If the bank license is revoked, continue to pay off the loan, keep all receipts for payment.
You can refuse the loan before signing the agreement or return it ahead of schedule, but you will have to pay the interest for the period of using the loan.
What happens if you do not repay the loan
- Inform the bank in writing about the situation and agree on new conditions (debt restructuring);
- Check the terms of the insurance contract – the situation may be an insured event;
- Evaluate offers from different banks for debt refinancing – it can be beneficial;
- Seek advice from lawyers and specialists in consumer protection.
Pros and cons of a home equity credit
Mortgage lending is positioned as the most profitable way to buy a home with a lack of funds. In many cases, this is really true because a mortgage is a loan with a lower interest rate and the ability to stretch the payment for many years. However, there can be pitfalls behind the high-profile ads of some organizations looking to attract new customers.
The mortgage remains a loan, which means that the bank will need information on your income. Assurances that you can get a mortgage without proof of income indicate that the interest rate will be higher than the average. Many banks offer benefits for existing customers. However, if you remove all the conditions under which the bank is guaranteed to lower the interest rate, the final interest may be much higher than you think. In addition, if a home equity credit is not paid, it will lead to the loss of housing, as well as money spent on repaying the loan. Such operations are considered the most risky during periods of economic instability.