Why do you need a home equity loan?
You’ve probably been wondering why people go for home equity, and you feel why it is needed.
Right?
Why people go for home equity is just beyond borrowing loans, but people see home equity as a way they can maximize the value of their asset.
What do I mean?
For example, let’s say you buy a house for 150 million Naira, over the line, you did renovation and the value of the property worth 250 million Naira.
Let’s say your mortgage rate is 30 million Naira.
So, how do you scale?
Here’s what happened…
If you wish to use your home as collateral, think about the equity built in the long run.
Plus, think about the lenders.
Why?
Because most of these lenders would only give you 85% – 90% of your market value.
Take, for instance, your property worth 250 million Naira.
Let’s do the math: 90% of 250 million = 225 million.
Let’s say your mortgage rate is 50 million Naira, minus the worth of your property with the mortgage.
We’ll have 225 million minus 50 million Naira = 175 million Naira.
The overall result shows you are qualified for a 175 million Naira equity loan.
This is the amount of equity you can borrow.
After all, you’ll receive a lump sum of 175 million in your bank account a few days later.
Here’s the bad news… Equity loans are not your regular salary payment, they are your burdens.
That’s why you don’t spend home equity loan on depreciating assets. It’s not about buying that fancy car.
I know some people who think equity loans should be spent on expensive gadgets or items.
Remember, it’s a loan.
You still have to pay a fixed payment every month.
The bad news? If you are not spending on assets that appreciate, you will lose the equity loan you borrowed in the long run.
This means you’ll struggle to meet your financial obligations.
The reason is that debt should be spent to improve the quality of your life and the value of your assets.
If you are not doing it this way, then you will find it hard to meet fixed interest rates, and your home could be at risk.
So,
What is a home equity loan?
A home equity loan simply means using your home as collateral to finance other assets or projects you could need extra cash for.
Plus, your home equity is built over time as your property appreciates.
First of all, you must understand asset value. The value of your asset may be determined via an appraisal.
In this case, the appraiser evaluates the property value and compares it to similar homes that have sold in the area.
When you leverage this approach, you will see more accurate valuation, although appraisals come at a cost.
For home equity, here’s how property owners can understand it.
The loan amount, or the mortgage balance, represents the sum a property owner owes to the lender.
When a person takes out a mortgage, the lender secures a fixed legal interest in the property until the loan is fully paid.
This means that, technically, the property owner does not have complete ownership until the mortgage is settled.
But the home serves as collateral for the loan, ensuring that if the borrower can’t pay the debt, the lender can reclaim the property through foreclosure and recover the outstanding balance by selling it.
Home equity is a powerful financial asset that property owners can leverage in various ways.
Buy a new home
When selling a property, property owners can apply their accumulated equity as a down payment on a new house, reducing the amount they need to finance.
This is often done through a bridge loan, which allows property owners to access their equity before selling their current home.
You can also borrow for other expenses
Property owners can take out a home equity loan, which enables them to access funds for home improvements, debt consolidation, or other major expenses.
Because home equity loans use the property as collateral,.
They typically come with lower interest rates compared to unsecured loans.
However, this also means that the home is at risk if the borrower fails to meet the repayment terms.
Plus, if you are also looking to fund your retirement, you can tap into your home equity through a reverse mortgage.
This allows you to convert a portion of their home equity into cash without monthly payments.
Instead, the loan balance grows over time and is repaid when the property owner moves out or passes away.
While a reverse mortgage can provide financial relief in retirement, it also reduces the asset value that can be passed down to heirs.
Types of second mortgage home loans
Traditional Fixed-Rate Home Equity Loan
This loan provides a lump sum at a fixed interest rate, repaid over a set term(typically 5–30 years).
Borrowers benefit from predictable monthly payments, making it ideal for large, one-time expenses like home renovations, debt consolidation, or major life events.
ince the interest rate remains constant, it shields borrowers from market fluctuations, which offers stability in long-term financial planning.
Home Equity Line of Credit
Borrowers can withdraw funds as needed during the draw period(usually 5–10 years), repaying only what they use.
This flexibility suits ongoing expenses like education costs, medical bills, or staggered home improvement projects.
However, the variable rate introduces uncertainty, as payments can fluctuate with market conditions.
Hybrid HELOC with Fixed-Rate Conversion
A lesser-known but increasingly popular option.
This hybrid product starts as a traditional HELOC but allows borrowers to convert a portion(or all) of their balance into a fixed-rate loan.
This combines the flexibility of a HELOC with the stability of fixed payments, making it an excellent choice for those who want initial access to funds but prefer locking in rates later.
Some lenders even permit multiple fixed-rate conversions at different times, optimizing repayment strategies.
Cash-Out Refinance
Though technically a refinance rather than a standalone home equity loan
A cash-out refinance replaces the existing mortgage with a new, larger loan, disbursing the difference in cash.
This option is good when current mortgage rates are lower than the original rate, as it can reduce overall borrowing costs while unlocking equity.
However, resetting the mortgage term may extend repayment timelines, increasing the total interest paid over time.
Standalone Home Equity Loan
A standalone home equity loan can serve as a second mortgage, allowing buyers to avoid private mortgage insurance when putting down less than 20%.
For example, an 80-10-10 structure(80% first mortgage, 10% home equity loan, 10% down payment) eliminates PMI while keeping borrowing costs manageable.
This approach is niche but valuable for buyers seeking optimal loan structuring.
Shared Equity Agreement
This can be useful for property owners needing cash without immediate repayment obligations, though it sacrifices long-term equity gains.
Reverse Mortgage
Exclusively for homeowners aged 62+, a reverse mortgage allows tapping into home equity without monthly repayments.
The loan balance(plus interest) is repaid when the homeowner sells, moves out, or passes away.
While beneficial for retirees needing supplemental income, it reduces inheritances and requires careful consideration of fees and long-term implications.
Balloon Home Equity Loan
Rare but still offered by some lenders, this loan features low monthly payments for a set period(5–7 years), followed by a large balloon payment of the remaining balance.
It can be useful for borrowers expecting a future windfall(bonus, inheritance, or business sale) but carries refinancing risk if they are unable to cover the lump sum when due.
Interest-Only Home Equity Loan
During the initial term(typically 5–10 years), borrowers pay only interest, after which principal payments begin.
This minimizes early payments, aiding cash flow management, but requires disciplined planning to handle higher payments later.
Secured Home Equity Loan with Asset Cross-Collateralization
Some lenders allow additional assets like investment properties, vehicles, or savings accounts as collateral alongside home equity, potentially securing better rates or higher loan amounts.
This complex structure is rare but can benefit high-net-worth borrowers with diverse assets.
Choosing the Right Home Equity Loan
Selecting the best option depends on factors like:
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Purpose of Funds(lump sum vs. ongoing access)
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Risk Tolerance(fixed vs. variable rates)
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Repayment Capacity(short-term vs. long-term)
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Future Financial Plans(home sale, refinancing, or retirement)
How do I build home equity?
Rising property values
When home prices increase due to strong demand, favorable economic conditions, or improvements in the neighborhood, your equity naturally grows.
However, this factor is largely outside of the property owner’s control.
Home improvements
Renovations such as kitchen and bathroom, energy-efficient modifications, and landscaping enhancements can increase a property’s value.
While these improvements require an upfront investment, they can pay off in the long run by making the home more desirable and valuable.
However, not all upgrades guarantee an increase in home value, so property owners should carefully assess which renovations will offer the best return on investment.
Reducing debt
Property owners who make regular mortgage payments steadily decrease their loan balance, thereby increasing their equity.
Choosing shorter loan terms, such as a 15-year mortgage instead of a 30-year loan, can help pay off the loan faster and build equity more quickly.
Plus, making extra payments beyond the required monthly amount can significantly reduce the mortgage balance and accelerate equity growth.
These additional payments are applied directly to the principal, reducing the loan amount and interest owed over time.
Your savings account
Over the years, as property owners make payments and their property value appreciates, their equity grows.
For those who continue making payments and decreasing their mortgage balance, home equity remains a reliable and valuable asset.
What are home equity rates?
Home equity rates determine the cost of borrowing against home equity.
These rates fluctuate based on a variety of factors, including market conditions, the borrower’s credit score, and the overall economy.
Lenders typically set home equity loan rates by considering benchmark interest rates, such as the prime rate, as well as an individual borrower’s financial profile.
When interest rates are low, home equity loans become more affordable, making them an attractive option for those looking to borrow against their home’s value.
Also, if rates rise, borrowing costs increase, and property owners may find it less advantageous to take out equity loans.
The interest rate on a home equity loan can be either fixed or variable.
A fixed-rate loan locks in an interest rate for the duration of the loan, providing stability and predictable monthly payments.
This type of loan is beneficial for those who prefer a consistent repayment schedule and want to avoid market fluctuations.
On the other hand, a variable-rate home equity loan comes with an interest rate that can change over time based on prevailing market conditions.
While these loans often start with lower interest rates, they carry the risk of increasing payments if interest rates rise.
Here’s the main gist…
Lenders evaluate the home equity loan rate based on the following.
Creditworthiness
Higher credit scores typically result in more favorable interest rates.
Borrowers with a strong credit history are seen as lower-risk clients, making them eligible for lower interest rates compared to those with poor credit.
The loan-to-value ratio, which compares the amount borrowed to the home’s appraised value, also influences the interest rate.
A lower LTV ratio indicates a lower risk for lenders and can result in better rates.
How to refinance a home equity loan
Refinancing a home equity loan can be a smart financial move if you are looking to secure a lower interest rate, reduce monthly payments, or access additional equity in your property.
Property owners who have an existing home equity loan but wish to change the terms, lower their rates, or adjust repayment schedules may consider refinancing as an option.
First of all,
Evaluate your current loan terms
This includes reviewing the interest rate, remaining loan balance, monthly payment amount, and any fees or prepayment penalties associated with early repayment.
If interest rates have decreased since you first obtained your loan.
Refinancing could provide an opportunity to lock in a lower rate and save money over time.
Similarly, if your financial situation has improved, perhaps your credit score has increased, or your income has become more stable, and you may qualify for better loan terms.
Assessing the value of your home(how much equity you have available)
Like I said.
A home appraisal may be required by lenders to verify the property’s current market value.
If the value of your home has increased since you took out your original home equity loan.
You may be eligible to refinance into a larger loan amount, allowing you to access additional funds if needed.
However, if property values have declined, refinancing might be more challenging.
As lenders typically require a minimum amount of equity to approve a new loan.
Research and compare lenders
Financial institutions, including banks, credit unions, and online lenders, offer refinancing options with varying interest rates, fees, and loan terms.
That’s why shopping around and obtaining multiple loan offers can help ensure that you secure the best possible deal.
Many lenders provide prequalification tools that allow homeowners to see estimated loan terms without impacting their credit scores.
The application process for refinancing a home equity loan is similar to that of a traditional mortgage.
Lenders will require documentation such as proof of income, credit history, tax returns, and details about your existing loan.
A strong credit profile and stable financial background can improve your chances of approval and result in more favorable loan terms.
Some lenders may also consider factors such as the debt-to-income ratio, which measures your total monthly debt payments against your income.
Once your application is submitted, the lender will conduct a thorough review, including a home appraisal if necessary.
If approved, the lender will provide a loan estimate outlining the terms, including interest rates, monthly payments, closing costs, and any applicable fees.
After closing, the new loan terms take effect, and your previous home equity loan is paid off.
Depending on the type of refinance, you may begin making new monthly payments under different terms or receive a lump sum if you opt for a cash-out refinance.
A cash-out refinance allows property owners to take out a larger loan than the existing balance.
Using the additional funds for home improvements, debt consolidation, or other financial needs.
However, this increases the total loan amount and requires careful consideration of repayment capacity.
How to obtain a home equity loan in Nigeria
As you know…
Home equity loans allow you to leverage the value of your property to access funds for various needs, such as home renovations, business investments, or debt consolidation.
First of all,
Understand the equity you have accumulated
Equity is calculated by subtracting any outstanding mortgage balance from the property’s current market value.
For instance, if a home is worth ₦100 million and the owner has an outstanding mortgage of ₦40 million.
The available equity would be ₦60 million.
Most Nigerian banks and financial institutions allow property owners to borrow a percentage of this equity, typically ranging from 50% to 80%.
Select a good lender
Banks, mortgage institutions, and private lenders in Nigeria offer home equity loans with varying interest rates, repayment terms, and loan conditions.
That’s why I recommend making comparisons from multiple lenders to secure the best terms.
Here are the conditions:
- Income level
- Creditworthiness
- The property’s legal standing before approving a loan.
Ensuring that the property has a valid title, such as a Certificate of Occupancy, is vital, as lenders typically require legal proof of ownership.
After choosing a lender, the application process begins.
Borrowers must submit documents such as proof of income, tax records, utility bills, a copy of the property title, and an official valuation report.
Nigerian lenders scrutinize these documents to assess the borrower’s repayment ability and the viability of the property as collateral.
If a borrower has an existing mortgage, the lender may also review the repayment history to determine financial responsibility.
Once the application is submitted and reviewed, the lender will conduct a review, which may involve site inspections and further verification of the property’s status.
If approved, the loan terms are outlined, including interest rates, repayment schedules, and any associated fees.
Upon agreement to the loan terms, the borrower signs a contract, and the funds are disbursed.
Depending on the type of home equity loan secured, funds may be provided as a lump sum or in installments.
How to get a home equity loan
Home equity interest rates play a crucial role in determining the cost of borrowing against the value of a home.
These rates define how much a property owner will pay in interest over the loan’s duration, influencing monthly payments and the overall financial impact of leveraging home equity.
Home equity interest rates refer to the percentage a lender charges a homeowner for borrowing against their built-up equity.
When a homeowner takes out a home equity loan or a home equity line of credit.
The lender applies an interest rate to the borrowed amount, which dictates the total repayment cost over time.
Lenders consider several factors, including the applicant’s credit score, debt-to-income ratio, loan-to-value ratio, and prevailing market conditions.
A higher credit score typically translates into a lower interest rate because it signals to the lender that the borrower is financially responsible and poses a lower risk.
On the other hand, a low credit score may lead to higher interest rates or even the denial of the loan application.
The loan-to-value ratio also significantly impacts interest rates.
LTV is the percentage of the home’s value that is being borrowed.
For example, if a home is worth ₦50 million and the property owner seeks a ₦20 million loan, the LTV is 40%.
In general, the lower the LTV, the better the interest rate, as lenders view lower LTV ratios as less risky.
Borrowers with high LTVs may face steeper interest rates or stricter lending terms.
In Nigeria, interest rates are influenced by monetary policies set by the Central Bank of Nigeria.
If inflation rises, lenders may increase interest rates to offset the depreciating value of money over time.
Plus, in a stable or declining interest rate environment, borrowers may secure more favorable rates.
The type of home equity loan selected determines whether interest rates remain fixed or fluctuate.
Fixed-rate home equity loans provide a stable interest rate for the entire loan term.
Making them ideal for borrowers who prefer predictable monthly payments.
In contrast, HELOCs often come with variable interest rates, which means the rate can change based on market conditions.
While variable rates may start lower than fixed rates, they pose the risk of rising over time, potentially increasing monthly payments unexpectedly.
Property owners looking to secure the best home equity interest rates should take proactive steps to improve their financial standing.
In this case, maintaining a strong credit score, reducing outstanding debts, and increasing home equity by paying down the mortgage can enhance eligibility for lower rates.
Shopping around and comparing offers from different banks, mortgage institutions, and private lenders is also crucial to finding competitive rates.