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A Home Equity Mortgage: Is It The Right Choice For You?

A Home Equity Mortgage: Is It The Right Choice For You?

Couple working out home equity

Couple working out home equity

A home equity mortgage can be a lifeline if you suddenly face unexpected expenses, leaving you in need of quick cash. While many Canadians rely on their savings accounts, sometimes the funds may fall short. In these situations, turning to loans becomes a common choice. However, as a homeowner, there are additional avenues to explore that might better fit your needs.

For most homeowners, a significant portion of their net worth lies in their property. Over the years, as property values appreciate and mortgage payments chip away at the principal, equity accumulates. When financial needs arise, whether for emergencies or other purposes, tapping into this home equity through a special home equity mortgage can be a cost-effective and secure solution instead of relying on a bank loan. Homeowners often prefer this option due to its lower interest rates and more flexible lending requirements compared to unsecured loans or other financial avenues they explore.

What Is A Home Equity Take Out Mortgage?

An equity take-out mortgage is a loan that lets you use some of the value stored in your home for different reasons. Home equity is the difference between what you owe on your mortgage and what your home is currently worth. You build equity in your home each time you make a payment toward your mortgage’s principal balance. Your equity can also increase if the market value of your home increases.

When you take out this loan, you can choose to get a fixed amount of money at a fixed interest rate, or you can opt for a variable rate and have access to a line of credit, which lets you withdraw cash as needed. It’s like borrowing money from your home’s very own savings account.

How Does A Home Equity Mortgage Work?

An equity take-out mortgage allows you to borrow money from a lender based on the value of your home. This can be done by getting a new mortgage on your property, increasing your existing mortgage amount, or securing a separate loan with your property as collateral.

It’s important to note that, depending on your credit rating, the interest rates for equity take-out mortgages might be higher than those for traditional mortgages though the rates are often much lower than an unsecured loan from the bank. Mortgage lenders see these loans as riskier in some cases which is reflected in the mortgage rate. This is why before deciding to borrow against your home, you should carefully review the terms and conditions of the equity take-out mortgage to ensure it’s the right financial move for you. Also, keep in mind that there will be fees for an appraisal, title search, title insurance, and legal consultation when setting one up so you will want to budget for those along the way.

What Types of Home Equity Loans Are Available In Barrie

If you’ve looked at the options and decided that accessing your home equity via a take out mortgage is your best choice, there are different types of mortgage loans available such as:

Second mortgages

A second mortgage is an additional loan you take out on your home, offering similar features to your primary mortgage. Typically, it allows you to borrow up to 80% of your home’s appraised value, minus the remaining balance on your initial mortgage. Second mortgages come with both fixed and variable interest rate options, often higher than those for primary mortgages. You’ll receive the loan amount as a lump sum deposited directly into your bank account so that you can fund the project you have in mind.

Home equity line of credit

A HELOC (Home Equity Line of Credit) is similar to a standard line of credit. You have the flexibility to borrow funds when you need them, up to the approved credit limit, and you repay them at your convenience, which means you can borrow repeatedly. Typically, you can access between 65% to 80% of your home’s appraised value through a HELOC. These loans have variable interest rates, meaning they can fluctuate when interest rates change so you will want to keep an eye on what the prime rates are and how much you are borrowing.

Reverse mortgages

A reverse mortgage is a type of loan designed for homeowners aged 55 and older. This type of mortgage allows you to borrow money based on the value of your home, typically up to 55% of its appraised value, minus any existing mortgage balance. You can choose between a fixed or variable interest rate, but these rates are usually higher than those of regular mortgages.

With a reverse mortgage, you receive the loan amount either as a lump sum deposited into your bank account or in installments. Unlike other loans, you don’t need to make any payments on a reverse mortgage until it’s time to pay it back. You must pay it back in full when you move out of your home, sell it, or if the last borrower passes away. At that point, you, or your heirs, will need to repay the loan amount along with the accumulated interest.

Advantages of Home Equity Take Out Mortgages

Typically, an equity take-out mortgage proves to be a more financially advantageous option compared to other borrowing methods. Some of the benefits include:

  • Access to substantial funds: You can borrow up to 80% of your home’s equity in one lump-sum payment.
  • Competitive interest rates: Home equity loans offer better interest rates when compared to credit cards, unsecured personal loans, or lines of credit.
  • Predictability: Opting for a fixed-rate home equity loan provides a steady repayment schedule that you can budget for regularly.

Disadvantages of a Home Equity Mortgage

When you’re weighing the pros and cons, these are some of the negatives to take into consideration:

  • Interest rates are typically higher compared to your primary mortgage. Even a small difference in percentage points can have an impact on your cash flow when borrowing a large amount.
  • Your home serves as collateral. Failure to repay the loan could result in the loss of your house.
  • Initial expenses are involved. Obtaining a home equity loan requires payment of upfront fees such as appraisal and legal fees.

Why Take Out A Home Equity Mortgage?

There are several reasons why people consider getting a home equity mortgage or line of credit. For example, you might need money for big changes in your life, like having a baby, investing in a business, renovating your home, or consolidating your debts. Or maybe you’re buying a new home, an investment property, or a vacation home and need money for a down payment.

Many Canadians use their home equity when faced with a large bill they can’t afford with their regular income. For instance, you might need money for your child’s university tuition, a necessary home repair, or a new car. Whereas others might use the loan to pay for major home improvements, like adding another floor to their house or expanding with an addition. 

If You’ve Decided A Home Equity Take-Out Mortgage Is For You, It’s Time To Give Me A Call

If you’ve read through the article, and are thinking that using your home equity is the right choice to fund your next project, it’s time to give me a call. I can look at all the mortgage options and interest rates available to you and find the best financing solution for your specific situation. Book a consultation with me at this link or give me a call directly at 705-315-0516 today to get started. Together we’ll find a way to tap into your home equity and get you access to the funds you need.

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