Anyone who has even a tangential interest in real estate has come across the terms mortgage and home equity.
They are two debt instruments that are regularly used by homeowners around the world, and if used wisely, they can form the foundation of a successful real estate investing journey.
Mortgages and home equity loans, like other types of financial decisions, have benefits and drawbacks, so it’s critical for investors to understand what they include before committing to either. As a result, we’ve put together brief descriptions of both to ensure that you’re well-informed before meeting with a financial advisor.
What Does Obtaining a Mortgage Loan Entail?
As previously stated in a previous blog post, a mortgage is a lump sum loan made by a financial institution to individuals to help them finance the purchase or construction of a property.
The borrower (person) promises the asset to the lender (buyer) over a period of time while contributing monthly or annual equity (repayment). The lender reserves the right to foreclose (seize) the borrower’s property if they default on their financial obligations to the lender (the amount borrowed plus interest).
The property is usually sold by the banking institution to recoup its funds in the unfortunate case of a foreclosure.
Primary Mortgage Institutions (PMIs), Commercial Banks, and the Federal Mortgage Bank of Nigeria are the most common lenders in Nigeria (FMBN).
Each of the three organizations offers large sums to qualified customers, with varying loan tenors and interest rates.
PMIs and banks frequently set a 20-year repayment term, subject to the national retirement age, and these loans are only eligible to people who have a regular monthly income.
The amount of money available for a loan is usually determined by the applicant’s income and capacity to make a downpayment of up to 30% of the purchase price.
These banks also provide more flexible credit alternatives, such as joint mortgages, in which married couples can apply for loans together and share the repayment burden, rather of having it fall only on one person’s shoulders.
On the other hand, these banks’ interest rates are often high, ranging between 12 and 18 percent. Also, fixed-rate mortgages aren’t always available, with more institutions opting for adjustable-rate mortgages (variable-rate).
What Does Obtaining a Home Equity Loan Entail?
Home equity, sometimes known as a “second mortgage,” is a type of loan secured by the real estate asset’s actual equity.
It is similar to a mortgage, but the main distinction is that a mortgage is given to make a purchase, whereas home equity loans are only available to people who already own a property.
If you want to buy a house, you’ll apply for a mortgage; but, if you currently own a house and need money for other reasons, you can use it as collateral and apply for a home equity loan.
One of the benefits of home equity loans is that they are available to people who haven’t finished paying off their first mortgage, hence the term “second mortgage.”
In this situation, the value of your home is compared to the remaining balance on your mortgage, resulting in your equity and the loan amount available to you.
This means that if your house is currently worth at $20,000,000 and you still owe $12,000,000 on your mortgage, your home equity is $8,000,000. (40 percent ). Lenders frequently grant up to 80% of the home equity in a loan, which in the aforementioned case would be $6,400,000.
Fully-owned homes can also qualify for home equity loans if their market value can be determined. Home equity loans are commonly offered by PMIs in Nigeria, and they are very simple to secure with the appropriate documentation.
You can easily convert the equity in your house to liquidity for other investments if you have an unencumbered title, a verified source of monthly income to facilitate repayment, purchase of mortgage redemption forms, and incur additional closing expenses (appraisal fee, origination fee, etc.).
Home equity loans are particularly useful for making down payments on a new home or for funding substantial home improvement projects.
There are a lot of downsides to home equity loans, the most serious of which is the constant risk of the borrower becoming homeless if the loan is defaulted on because the property is the collateral.
Another risk element is that if the loan is taken out on a home that is still owed money, the borrower’s repayment load will be doubled because they would be responsible for both the original mortgage and the home equity loan.
Comparing Home Loans and Mortgage Loans
Your options would be significantly constrained if you took out a personal loan. Only two lenders, Barclays Bank and Tesco Personal Finance, were willing to lend over a 10-year period out of all the lenders listed on Moneyfacts for unsecured personal loans.
Although having fewer options isn’t always a bad thing, personal loans are a poor alternative in this scenario due to the high interest rates.
Tesco Personal Finance charges an average interest rate of 7.9% on a £20,000 10-year loan. Barclays’ rate may be more competitive (though I doubt it), but it’s difficult to judge because Barclays utilizes “personal pricing,” which means prices are determined based on your specific circumstances.
A better option would be the Abbey (5.64 percent) and Cheshire (5.84 percent), Nationwide (5.68 percent), Norwich & Peterborough (5.58 percent), and Yorkshire (5.69 percent) building societies’ 10-year fixed-rate mortgages.
Even with the arranging fees, a mortgage is likely to be less expensive than a personal loan. However, you must examine the overall cost of borrowing – including mortgage arrangement fees – of the two forms of loans to be confident which will provide you with the best bargain.
What Document do you need For Mortgage
Applying for a mortgage will require a lot of paperwork, this will enable you know the expected document in your possession before your application.
Remember that all these documents should have a vital and consistent information, such as the spelling of your name and address. This way they will be more validated for the lender to use as evidence. If you’re purchasing with someone else and you already live together, you’ll need their name to be on at least one of the utility bills too.
When you apply for a mortgage within the UK with a bank or other styles of lender, they’ll need full assurance that you just will make a repayment. Before they grant your application, they’re going to request various kinds of paperwork to prove and validate your identity and personality.
Different lenders might request for various documentation, making it hard to understand the precise paperwork needed. The categories of the document which could be requested by a lender are as follows; Proof of ID to submit a loan application, your lender will must know who you’re and where you reside.
To prove this, you’ll need the subsequent documents: Current photo passport or drivers license – remember that this could have your valid address on, to avoid complications. ensure you check the expiry date – you can’t use an invalid variety of ID. Most recent utility bill (gas/electric e.t.c) – remember to indicate the complete bill and not just the summary page.
These are hard to induce hold of during a digital age, so you will must download them, or request a paper copy from your provider. Bank statement or MasterCard bill – must be dated within the last 3 months. Proof of Income and Proof of Expenses. Importantly, they have to understand who you’re, what quantity you create and the way much you spend.
You will owe your lender a stack of documents once you apply and through countersigning that show you’ll be able to repay the loan. A loan application typically requires a written record to verify: • Assets and debts. • Identity • Income and employment. • Credit history. • Rental history. • Other information, like divorce, bankruptcy or gift funds
How much do banks make on a Mortgage
Origination fees are usually charged at a rate between 0.5 to 1% of the mortgage value. So, on an asset valued at $200,000 you would pay $1000 if the origination fee is calculated at 0.5% and $2,000 at a rate of 1%. The average interest rate on a mortgage in the USA is 3.99% on a 30 year fixed-rate mortgage
Conclusion
Any borrower considering any of these instruments should perform comprehensive study before making a decision, as what may appear to be evident profits in the near term may turn out to be false in the long run.
Also, rather than spending money on frivolous products or trips, home equity loans should be used for expenses that will add value to the home.