Mortgage Loan vs. Home Equity Loan: Which Is Better?
Introduction
Owning a home is a major milestone — but sometimes, you need extra money to buy your dream house or to unlock cash tied up in your existing property.
In Nigeria, two common ways to borrow money against real estate are:
- Mortgage Loans — mostly for buying or refinancing homes
- Home Equity Loans — borrowing against the value you’ve built in your current home
Though both use your house as collateral, they serve very different purposes.
This comprehensive guide will help you understand:
- What each loan type is
- The pros and cons of each
- How they work in Nigeria
- Which loan might be best for your situation
What is a Mortgage Loan?
A Mortgage Loan is a loan designed specifically to help you buy a home or refinance an existing mortgage. You borrow a large sum, secured against the property, then repay it in monthly installments — typically over 10 to 30 years.
Key Features:
- Purpose: Buying or refinancing a property
- Loan Term: Long, usually 10–30 years
- Interest Rates: Can be fixed or variable, often lower than other loans
- Repayment: Regular monthly payments covering principal and interest
- Collateral: The property being purchased or refinanced
Mortgage Loans in Nigeria
In Nigeria, mortgage loans are offered by:
- Commercial banks (GTBank, Access Bank, Zenith Bank)
- Federal Mortgage Bank of Nigeria (FMBN)
- Specialized mortgage institutions and housing finance companies
Interest rates tend to be higher compared to developed countries — typically between 10% and 20% annually.
Typical eligibility requirements include:
- Proof of income (salary slips or business documents)
- Good credit history
- Adequate down payment (usually 10-30%)
- Property valuation
What is a Home Equity Loan?
A Home Equity Loan lets you borrow money against the equity in your existing home. Equity is the difference between your home’s market value and the amount you still owe on your mortgage.
Key Features:
- Purpose: Access cash for renovations, education, debt consolidation, emergencies
- Loan Term: Shorter than mortgages, usually 5–15 years
- Interest Rates: Typically fixed, may be slightly higher than mortgage loans
- Repayment: Fixed monthly payments
- Disbursement: Lump sum
- Collateral: Your existing property
Home Equity Loans in Nigeria
Home equity loans are less common but growing in Nigeria. They are available through:
- Some commercial banks and mortgage lenders
- Private lending institutions with mortgage products
To qualify, you need to have built sufficient equity, a good credit rating, and proof of income.
Key Differences Between Mortgage Loans and Home Equity Loans
| Feature | Mortgage Loan | Home Equity Loan |
|---|---|---|
| Purpose | Buy or refinance a home | Borrow against existing home equity |
| Loan Term | Long term (10–30 years) | Shorter (5–15 years) |
| Interest Rates | Usually lower, fixed or variable | Usually fixed, slightly higher |
| Collateral | Property being purchased or refinanced | Your current home |
| Loan Amount | Based on property price | Based on equity (market value – loan balance) |
| Disbursement | Lump sum | Lump sum |
| Tax Benefits | Possible (depends on country) | Possible (depends on country) |
When to Choose a Mortgage Loan
- You are buying a new home and need financing.
- You want to refinance an existing mortgage for better rates or terms.
- You prefer a longer repayment period to keep monthly payments low.
- You want access to generally lower interest rates.
When to Choose a Home Equity Loan
- You already own a home with substantial equity.
- You need a lump sum for major expenses (home repair, education, business capital).
- You want fixed monthly payments for easy budgeting.
- You don’t want to refinance your entire mortgage.
How to Calculate Your Home Equity
Here’s a simple formula:
Home Equity = Current Market Value of Home − Remaining Mortgage Balance
Example:
- Market value: ₦20 million
- Mortgage balance: ₦12 million
- Home equity: ₦8 million
You can borrow up to a percentage of your equity — usually 70%–85%, depending on lender policies.
Real-Life Example: Aisha’s Decision
Aisha lives in Lagos and owns a home worth ₦25 million, with ₦15 million remaining on her mortgage. She wants ₦5 million to renovate her kitchen and start a small side business.
- Mortgage Loan? Not suitable — she isn’t buying a new house.
- Home Equity Loan? Perfect — she can borrow against her ₦10 million equity.
She applies, gets approval, and receives the funds as a lump sum with fixed monthly payments.
Things to Consider Before Applying for Either Loan
1. Your Credit Score
Banks in Nigeria check credit scores. A good rating gets you better rates and approval chances.
2. Loan-to-Value (LTV) Ratio
Lenders limit how much they’ll lend based on your property value.
3. Interest Rates & Fees
Look out for:
- Processing fees
- Appraisal fees
- Early repayment penalties
4. Repayment Ability
Only borrow what you can repay comfortably.
Common Mistakes to Avoid
- Ignoring total loan costs: Interest + fees can add up significantly.
- Not comparing offers: Rates and terms vary widely.
- Using home equity for non-essential spending: Risks losing your home.
- Failing to plan for repayment: Have a clear repayment strategy.
Alternatives to Consider
- Personal Loans: No collateral but higher interest rates.
- Refinancing: Lower your mortgage rate instead of taking new debt.
- Savings: Build funds gradually to avoid debt.
Frequently Asked Questions (FAQs)
Q1: Can I have both a mortgage and a home equity loan?
Yes. Many homeowners have a mortgage to buy the house and later take a home equity loan for other expenses.
Q2: What happens if I default on these loans?
The lender can foreclose and sell your property to recover the money.
Q3: Which loan has lower interest rates?
Typically, mortgage loans have lower rates due to longer terms and the loan purpose.
Q4: Can I use home equity loans for business purposes?
Yes, but ensure the lender permits it and you have a repayment plan.
Final Thoughts
Choosing between a Mortgage Loan and a Home Equity Loan depends on your current homeownership status, financial goals, and borrowing needs.
- Use a Mortgage Loan if you are buying or refinancing your home.
- Use a Home Equity Loan if you need cash from your existing home’s equity.
Always research, compare offers, and consider professional advice before making decisions.
Call to Action
Thinking of borrowing against your home?
Contact trusted Nigerian banks or mortgage experts today to explore your best options!