Introduction: The world of personal finance is, without any doubt, filled with lots of loans which range from personal loans to home loans. Every one of them has its independent uses. What if you want a home but already have a personal loan and are wondering whether you can convert it into a home loan? Let’s try to understand this very interesting question and see the possibilities one can think of.
Can You Convert a Personal Loan to a Home Loan
Personal Loans Vs. Home Loans
Personal Loans: These are generally unsecured loans that individuals can use for multiple purposes, such as debt consolidation, home renovation, or covering emergency expenses. The approval and interest rates for personal loans often depend on factors such as your credit score, income, and pre-existing debt.
Home Loans or Mortgages: On the other hand, home loans specifically refer to monetary loans made to an individual against a property/house for the purpose of purchase or even raising funds to purchase a property. These loans are secured by the property being purchased, which means that the lender has the right to take the borrower’s property in case of non-repayment.
Is Conversion Possible?
Though converting a personal loan into a home loan is not common, borrowers can consider doing so in the following ways:
- Refinancing: It is possible to refinance a personal loan into a mortgage, as well. A refinancing is a new loan that is going to replace your existing one. Usually, the terms of this new loan can be more beneficial, offering lower interest rates or even a longer payback period to lower your monthly installments.
- Home Equity: If you’ve already acquired a home through a personal loan or other means, you can liquidate your home equity to clear off your personal loan. Home equity loans or a home equity line of credit (HELOC) allows homeowners to borrow against the equity they’ve built in their property.
- Secured Personal Loan: Though personal loans are generally unsecured, some lenders provide secured personal loans that are guaranteed against collateral, such as a vehicle or property. If you have a good amount of equity in your home, you might be able to use it to secure a personal loan and then pay off your existing personal loan with the funds.
Things to Keep in Mind Before Converting
Some things that you must keep in mind before you decide to convert are as follows:
- Interest Rates: The interest rates and terms of both loans must be compared to ensure that it’s a saving by refinancing or by using home equity.
- Fees and Closing Costs: Think of the fees you might need to pay while refinancing or taking out a home equity loan, like application fees, appraisal fees, and closing costs.
- Risk: Shifting unsecured debt to secured puts your home in jeopardy if you’re not able to make the payments. Decide accordingly with great care and by looking at the financial numbers if this move is right for you.
Conclusion
Although there may not be a direct personal loan to home loan conversion, other avenues could be explored. Whether by refinancing, using home equity, or getting a secured personal loan, there are some options for the borrower to go from one type of loan to another. However, one needs to weigh the possible benefits against the possible risks in this transition and possibly seek the advice of a financial adviser on how to proceed. Again, there are different financial situations, and what works for one person may not necessarily be the best one for another.