Home equity is a homeowner’s interest in a home. It can increase over time if the property value increases or the mortgage loan balance is paid.
In a lame man language, home equity is the portion of your property that you actually own. However, if you borrowed money to buy it, your lender also has an interest in it until you pay off the loan.
Example
The easiest way to understand equity is to start with a home’s value and subtract the amount owed on any mortgages. Those mortgages might be purchase loans used to buy the house or second mortgages that were taken out later.
Let’s assume you purchased a house for Kes 2,000,000, made a 20% down payment, and got a loan to cover the remaining Kes 1,600,000. In this example, your home equity interest(what you own) is 20 % of the property’s value.
The property is worth Kes 2,000,000 and you contributed Kes 400,000 or 20% of the purchase price. Although you’re considered to own the property, you really only “own” Kes 400,000 worth of it. Your lender doesn’t own any portion of the property. Technically, you own everything, but the house is being used as collateral for your loan. Your lender secures its interest by getting a lien on the property.
Now, assume your home’s value doubles. If it’s worth Kes 4,000,000 and you still only owe Kes1,600,000(what you owe the bank), you have a 60% equity stake( the Kes 2,400,000 is now your equity). You can calculate that by dividing the loan balance by the market value and subtracting the result from one. Your loan balance hasn’t changed, but your home equity has increased.
What is a Home Equity Loan?
Are you already a homeowner? And you want funds to pay for your children’s education, a business, or home improvements? Why don’t you unlock the borrowing power of your home? Curious how? By acquiring a home equity loan. Moreover, this loan is basically on top of the already owned loan for your home.
Home equity loans are tempting because you have access to a pile of money (often at fairly low-interest rates). They’re also relatively easy to qualify for because the loans are secured by real estate.
However, before you take the money, look closely at how these loans work and understand the possible benefits and risks.
For example, your bank may let you take out a home equity line of credit or a home equity loan.
A home equity loan
A home equity loan is a lump-sum loan, which means you get all of the money at once. The repayment is with a monthly instalment that you can count on depending on the life of the loan. You’ll have to pay interest on the full amount. Your interest rate is usually fixed as well, so there will be no surprising hikes later. Note that you’ll likely have to pay closing costs and fees on your loan.
Home Equity Line of Credit (HELOC)
A HELOC is essentially a line of credit that’s usually worth up to 85% of your home’s value minus the remaining balance of your mortgage. You can use this money for just about anything. But you may benefit from using the HELOC to fund a home renovation that would increase your property’s value. Maybe you want to start a small business.
In conclusion, you should contact your lender/financial advisor and gather more information.
