What Are Home Equity Loans And How Can Canadians Use Them?
A term loan that allows homeowners to borrow money against the equity in their home is known as a home equity loan. Continue reading to learn more about home equity loans and how Canadians can benefit from them.
Source: Freepik
If you own a home, it creates home equity for you. The home equity building starts right from the time you make the first mortgage payment. As you make mortgage payments and pay down your mortgage, you gain the full home equity. You can pledge this home equity as collateral to take loans in Canada for various purposes.
A home equity loan is a loan a borrower takes against the equity of the home one owns. Since you use your home as collateral considered being secured, you can get larger amounts sanctioned with lower interest rates than the unsecured loans.
What is home equity loan?
A home equity loan is a term loan that is secured. It enables homeowners to take a loan using the equity of their homes. The lender will approve the home equity loan on the mortgage registered to the title of the home.
The lender has the legal right to recover the outstanding loan amount by selling the home in case of the borrower defaulting to pay the outstanding loan.
How much is my home equity?
The worth of your home equity is the difference between your home’s market value at that point and the mortgage amount you owe, and the other loan amounts taken against your home.
The lender will arrive at the worth of your home equity after deducting the amount of the mortgage you have paid. For example, if your home is worth $600000, and if you owe $400000, then you have home equity worth $200000, against which you can apply for loans.
You can get up to 80 percent of your home equity as a second loan. In our example, it is $160000 or less.
How does a home equity loan work for me?
You can use your home equity as collateral. This works as a secured loan for you. Your lender will allow you to borrow a certain amount that you are eligible for.
Lenders will approve the amount approved based on pre-determined criteria of checks and evaluations. You need to pay in fixed installments by a stipulated date along with the interest component.
How do I get a home equity loan?
The pre-conditions are:
- You need to own a house.
- A competent body appraises the present home value.
- You have paid a significant amount of your mortgage.
- You have the financial ability to take a second loan.
Types of home equity loan
The home equity loan comes in two forms, disbursement of onetime lump-sum amount and home equity line of credit (HELOC).
The one-time loan amount could be 80 percent of the home equity worth that you own minus the amount outstanding from any prior mortgage. You need to pay back the loan within a specified term unless the lender renews or restructures it (payment term extended).
Traditional loan types:
- Home Equity Loans
- HELOC
- Refinancing
- Second Mortgage
You might be interested to know about refinancing and second mortgage loans.
Which is the more popular method of home equity extraction?
The equity extraction was at its peak in 2017 at $89 billion (about $270 per person in the US). Heloc seems to more popular in extraction than refinancing. Heloc contributed $49 billion, and refinancing contributed $40 billion (about $120 per person in the US) to the total equity extraction in 2017.
Although the equity extraction rose between 2014 and 2017, it recorded a decline in 2018.
https://www.bankofcanada.ca/2019/09/staff-analytical-note-2019-27/
How do I use my home equity loan?
You can borrow up to 80 percent of your present home appraised value after deducting the balance to be paid on your mortgage. You need to serve both loans concurrently.
What is HELOC?
A line of revolving credit, Home Equity Line of Credit differs from a home equity loan. The home equity loan is a one-time lump sum amount given as a loan. In Heloc, you will receive a considerable sum of money as a line of credit.
You can use a part or full amount at your discretion. As you go on paying the loan, the loan will get replenished. You can access the same amount as the loan that you have paid off.
How to access Heloc?
You need to go to your bank and open a line of credit. You can also go to mortgage lenders and financial institutions to open a line of credit with them. Any institution, before granting the line of credit will do the due diligence to qualify you for HELOC.
They will check your credit score, your creditworthiness, repaying capacity, financial health, and stability. You need to appraise your home to ensure your home carries enough equity to qualify. You are eligible for Heloc if your home has generated at least 20 percent of home equity.
How to use Heloc?
You can access up to 65 percent of the present home equity of the property appraisal value. Some lenders allow you to combine Heloc with your remaining mortgage. This increases the limit of borrowing up to 80 percent of your home’s appraised value.
Once the lender sanctions Heloc, you can borrow money from the balance amount as you wish and keep repaying to keep a healthy balance available for future use.
Benefits you reap from home equity loans.
- Home equity strengthens your home’s value.
- The interest amount is deducted from your overall tax payable
- You can use home equity for any purposes.
What do you need to watch out for before taking a home equity loan?
- There are various fees associated with a home equity loan which reduces the real amount extended to you as a loan by the lender.
- Variable-rate may rise in the future increases your interest amount on the loan.
- Using home equity for investment comes with inherent risks.
- Failing to pay the home equity loan may cause the seizure of your home.
