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What Is An Equity Take-Out Mortgage?

What Is An Equity Take-Out Mortgage?

Couple laying on the ground with a home outline around them

Couple laying on the ground with a home outline around them

If you’re like many Canadian homeowners at the moment, you’re likely looking for different ways to increase your monthly cash flow and how to pay down your debts. Maybe you want to finish paying off your existing mortgage, you want to move into a larger home, or you just want to feel a little more secure financially with all the talk of the cost of living increasing. An equity take-out mortgage may be the solution you’ve been looking for to help you achieve your financial goals.

What is an equity take-out mortgage?

An equity take-out mortgage is a type of mortgage where a homeowner can access the equity they have built up in their home by borrowing against it. Equity is the difference between the current value of the home and the amount of any outstanding mortgage or other loans secured against the property.

How does an equity take-out mortgage work?

With an equity take-out mortgage, a homeowner can borrow money from a lender based on the equity they have in their home. This can be done by taking out a new mortgage on the property, increasing the amount of an existing mortgage, or taking out a separate loan secured against the property.

The funds borrowed can be used for a variety of purposes, such as home renovations, debt consolidation, creating a line of credit as a safety net, or investing in other assets. However, depending on your credit rating the interest rates for equity take-out mortgages may be higher than those of traditional mortgages, as they are considered higher risk for lenders in some cases. It is also important to carefully consider the terms and conditions of any equity take-out mortgage before borrowing against your home on the off chance that it’s not the right financial decision for you.

Smart reasons you should use your home’s equity for financial gain:

You need access to cash to make an investment

Using your home’s equity can provide a source of cash that you can use for various purposes, such as home renovations, paying for education expenses, consolidating debts, or investing in other assets.

You normally receive lower interest rates

Home equity loans typically have lower interest rates than credit cards and other types of loans, making them a cost-effective way to access cash if you have a great credit rating.

You want to take advantage of tax benefits

Interest paid on a home equity loan may be tax deductible, depending on the purpose of the loan and other factors. Consult with a tax professional and your mortgage broker to gain advice given your specific situation.

You want fixed payments

A home equity loan typically has a fixed repayment schedule, which can make it easier to budget and plan your finances long-term.

You want to build equity faster

By using the equity in your home to pay off other debts, you may be able to reduce your overall debt load and build equity in your home faster as you’ll likely waste less money on interest payments long-term.

What you need to realize before using your home’s equity for financial gain

You have the risk of foreclosure

When you obtain an equity take-out mortgage, you are essentially borrowing against the equity in your home. If you are unable to make your mortgage payments, you risk foreclosure and losing your home.

You may have higher interest rates compared to other traditional mortgages

This means you may end up paying more in interest charges over the life of the loan especially if you’re not able to make your mortgage payments on time. Although a home equity loan can help increase your cash flow it still also increased your regular monthly mortgage payments so you need to make sure that trade-off makes sense.

You may have additional fees to pay

Equity take-out mortgages may come with additional fees, such as appraisal fees, legal fees, and other closing costs. These fees can add up quickly and increase the overall cost of the loan if you’re not careful.

You reduce the overall equity in your home

An equity take-out mortgage reduces the equity you have in your home as you’re basically giving yourself a cash advance using the equity you have built up. This means if you need to refinance in future or want to sell, and market values have come down from where they are today you might not break even on the sale or the bank might not refinance your mortgage for the overall amount. That means it is possible that in future your mortgage might be worth more than your home which is not a good situation to be in financially.

You could be tempted to overspend

Access to a large amount of cash may tempt you to overspend or take on more debt than you can afford. This can lead to financial difficulties and ultimately would put your home at risk. More money is no easier to manage if you’re bad at it.

Is accessing your home equity with a take-out mortgage a good option for you?

Choosing between all of the different types of mortgages and options for different loans all depends on you and your current financial situation. That’s why it’s always important to talk to a certified, accredited mortgage professional to find a mortgage solution that works for you and your unique circumstances. If you’d like to learn more about your mortgage refinancing options or alternative mortgages or loans, connect with me today and let’s talk. Call (705) 315-0516 to book your appointment or click to book an appointment now; you’ll be glad you did!

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