September 25, 2019

“What are home equity loans? A guide for Canadians”

“What are home equity loans? A guide for Canadians”

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Are you living in Canada? Do you own a house that you want to consider as a wealth-building asset for your future? Well, let’s break down the important aspects of home equity loans, to make sure to have a complete understanding of the ways you can leverage your equity properly. Make sure to have a place to take notes from the points below before you decide to avoid any kind of stress in the Canadian mortgage market. 

What Is Home Equity? 

Simply put, home equity is the difference between what you owe on your home and your home’s market value. Let’s take an example to better understand it. For instance, if your home has a market value of $600,000 and you only owe $100,000, you have $500,000 of equity remaining in your home.
On its turn, home equity loan by definition is a specific type of a loan in which the borrower uses the equity of his or her home as collateral. Since in home equity loans you can borrow against the value of your home, this type of loans may be considerably easier to qualify, as the loan is secured by your house. Thus, the home equity loan is a beneficial option in cases of large expenses related to home renovations, college tuitions, consolidating debts, and other kinds of relatively major expenses. 

Now, that we have a basic understanding of home equity loans, let’s have a quick look at different types of them, with their characteristics and benefits. 

Fixed-rate Home Equity Loans: 

Simply put, the fixed-rate home equity loan is a one lump sum payment type of loan. The borrower gets one lump sum payment from the lender, which has to be repaid with a set interest rate over a certain period. In fixed-rate home equity loans, the interest rate and monthly payments stay the same over the loan. The typical time for fixed-rate loans is running from five to 15 years, and in case the home is sold the loan has to be paid back fully. In the fixed-rate equity loan, the cofixed-ratest of the closing amount is generally similar to the cost of closing on a mortgage. One of the primary benefits of this loan is that considering the unstable rate environment, this option brings some simplistic grounds for your budgeting. Your monthly payments remain the same over the life of the loan and do not increase. 

What is a HELOC?

HELOC stands for “ Home Equity Line Of Credit.” This loan type is like a mixture of a checking account and a credit card, mainly because just like a credit card you borrow money with an approved limit. 

Dissimilar to a fixed-rate loan, the interest rate for HELOC will vary according to the market rates, which means that there is a possibility of the rates could change during the duration of the credit line. However, similar to fixed-rate loans, HeELPC has a set term where at the end of the term the demonstrative amount of the loan must be fully repaid. The general requirements of HELOC include that the borrower maintains the annual payments and a balance of it. 

What is a reverse mortgage home equity loan?

You can be qualified for a reverse mortgage if you are a homeowner in Canada, who is 55 or older. One of the primary characteristics and benefits of a reverse mortgage for many people is that they do not have to make regular payments. The conditions are so that you do not need to pay the loan until you move out or sell your house. Moreover, with the reverse mortgage, the bank makes lump-sum of monthly payments to you. The value and equity of your home, the property type/location, and the number of secured debts are the conditions that would affect the amount you qualify for the loan. One of the purposes of this type of mortgage is also to help you increase your income and make you have a more comfortable retirement. 

Benefits of home equity loans in CANADA?

  • Home equity loans provide you with money which you can use for any reason
  • Depending on the specific loan, you can receive the money in a lump sum
  • HELOCs allows you to access your funds through a credit card or cheques
  • In the case of reverse mortgages, you do not have to make regular payments, which may help you to improve your cash flow
  • Most equity loans in Canada have considerably lower rates than unsecured loans and credit cards.

The cons of home equity loans

  • As discussed earlier, HELOC has variable rates, meaning your interest rate will increase according to your prime rate, including your monthly payments. This can raise some difficulties in budgeting, especially if you have a fixed income.  
  • There are special requirements and qualifications for home equity loans which can be difficult to cover if you have poor credit or low income 
  • The interest rates of some of the mortgages are as high as 10% or more, especially in case if you have low income. 

So, in case you are interested in taking any type of home equity loans make sure to have a second look on this blog. If you have any further questions regarding home equity loans make sure to contact us. We are waiting for YOUR call.