Among the three basic necessities, only “Shelter” can be leveraged for cash. Home equity loans in Kenya provide lower-interest cash during a financial crisis. One of the benefits of home ownership is the opportunity to benefit from the housing market’s performance when it is performing well.
In addition to getting a low interest rate, you also have an appreciating asset that you can leverage. You could complete a number of important projects without impeding your long-term financial goals if you have a solid plan in place to utilize your home equity.
What Is a Home Equity Loan?
A home equity loan is a loan taken out against the equity in your home. You get a home equity loan based on how much you owe on your mortgage and how much your house is worth. It is also known as a home equity installment loan and is a form of consumer debt.
Additionally, a home equity loan can also be called a “second mortgage” which allows you to keep your existing mortgage while taking out a new one time loan against your home’s equity. You repay the loan with equal monthly payments over a fixed period.
What you should know about home equity loans in Kenya
Take advantage of your home’s equity by taking a loan, but consider how long you plan to stay in your home before applying for a home equity loan. Your loan or credit line must be paid off before your sale date. Depending on how much you owe on your mortgage and how much you pay in closing costs, you could walk away with little or no profit from the sale.
How a Home Equity Loan Works
The concept of a second mortgage is essentially the same as that of a home equity loan. Lenders use the equity in the home as collateral. Borrowing capabilities for homeowners will partly depend on the combined loan-to-value ratio, which will range from 80% to 85% of the assessed value of the home. Of course.
Banks in Kenya that offer home equity loans
How to determine home equity loan amount and interest rate
The amount of the loan and the rate of interest charged also depend on:
- The borrower’s credit score
- Previous payment history.
- Value of the home
Two varieties of home equity loan
Home equity loans come in two varieties, which are:
- Fixed-rate loans: In this case, the borrower receives a lump-sum payment which is repaid over a fixed period, and the payments and loan interest percentage remain the same.
- Home equity revolving lines of credit: A home equity line of credit (HELOC) is like a credit card that has a variable or adjustable rate of interest
Advantages and Disadvantages
Home equity loans have several benefits, including their affordability, but they also have drawbacks. The pros and cons include:
- Easy to get and source for
- Room for fixed interest rates
- Flexible use of funds
- Lower interest rates than other debt
- Possible tax benefit of interest paid
- Two mortgage payments running at the same time
- Higher interest rate and payment of premium
- Comes with Closing costs
- Possible spiraling debt
- Can lead to home foreclosure
Example of a Home Equity Loan
For example, if your home is currently worth ksh. 800,000 and your current mortgage balance is Ksh 500,000, you have Ksh 200,000 of equity in the home and could borrow up to ksh. 80,000 (80% of ksh. 200,000) with a home equity loan.
Let’s say you have a loan with a balance of ksh. 50,000 at an interest rate of 26% with one year left on the term. Paying off that debt to a home equity loan at a rate of 10% with a term of four years would actually cost you more money if you took all four years to pay off the home equity loan.
Note: Remember that your home is now collateral for the loan.
The Right Way to Use a Home Equity Loan
- When you have a stable and reliable source of income.
- When you do not have additional loans elsewhere and borrow responsibly.
- If you plan to use a fixed-rate home equity loan to cover a large purchase, such as the cost of a new roof on your house or an unexpected personal need..
Benefits of home equity loan to borrowers
- Home equity loans provide an easily accessible source of available cash.
- Helps in consolidating pressing debts
- The interest rate on a home equity loan is way low compared to the rates on credit cards and other consumer loans.
Benefits of home equity loan to Lenders
- Gets interest income and fees from the borrower’s initial mortgage and earns even more from the home equity loan.
- For defaulting borrowers, a lender gets both the initial mortgage and the home equity loan; it also gets to retake back the property and sell it again, starting the cycle over with the next person.
Note that a home equity financing can be set up as a fixed loan or a line of credit. A home equity loan provides you with the total loan amount upfront.
Look around for loan plans you can get from banks, SACCO, credit unions, and mortgage companies when considering a home equity loan or credit line. Shopping or conducting a careful review of all financial institutions can help you get a better deal.
Keep in mind, however, that the amount you borrow through a home equity loan is secured by your home. The lender may have the authority to forcibly sell your house if you don’t pay your debt. Make sure you understand your home equity loan terms.