As a homeowner, you already know that one of the many benefits of owning a property is getting to build equity. Home equity is the difference between the value of your home and how much you owe on your mortgage. Or, in other words, it’s the portion of your home or mortgage that’s been paid off. If you’ve just bought a property, chances are you don’t have much equity built up in your home. But after a few years, you’d be surprised how quickly your equity builds.
Home equity can be used as a source of financing that you can tap into it at any time to help you reach other financial goals. In Canada, homeowners can borrow up to 80% of their home’s appraised value for whatever they need. However, it’s important to note that you shouldn’t just access your home equity for recreational purposes like vacations or a new sports car.
If you need that extra boost to help you move forward with your next financial venture, using your home equity may be the key. Read on to learn how you can tap into your home equity and the most common reasons why people use it even though they have to make changes to their mortgage to do it.
In Canada, there are a few ways you can access the equity in your home. The most common being:
- Home Equity Line of Credit (or HELOC)
- Home Equity Loan or Second Mortgage
- Cash-Out & Refinancing Your Mortgage
Very similar to the process of getting approved for a mortgage, a lender will need to do a review. They will evaluate the value of your home, your current financial situation, and coordinate closing if you are approved. To learn more about each option and which one may be best for you, work with a professional mortgage broker and financial advisor. It all usually depends on how much you want to access and what your purpose is for using it.
When should you tap into your home equity?
There are a variety of reasons why you might consider using your home equity. As an example, using your home equity may be more affordable to repay compared to a regular loan because interest rates are lower on mortgages than bank loans. Or it’s because you can get a tax deduction on the interest you’re charged when you reborrow against your home equity. Here’s the thing though… You don’t want to use your home equity for things like shopping sprees or fancy vacations. Remember, this is still money you will have to repay one way or another. Using your home equity should be used in a way that will help you financially or to invest in your future.
These are a few common things people use their home equity for.
1. Home improvements
Probably the most common reason why people take out a home equity loan or HELOC is that they want or need to make home improvements. Renovations are a great way to fix, beautify, and most importantly increase the value of your home — You can access your home equity to finance larger projects like kitchen renovations or deck repairs. Usually, when you make upgrades to your home, these investments will increase the value of your home. So, in a way, you can think of that money you borrow as a way of increasing your property’s worth.
2. Post-education costs
If a lender approves it, using home equity to pay off school loans and tuition fees could be very advantageous. This of course depends on whether your student loan interest rates are higher or lower than your interest rate on your home equity loan. Just be sure to weigh out the pros and cons along with consulting a financial advisor. Defaulting on your student loans affects your credit. Defaulting on your home equity loan will affect your house.
3. Buying a second property
Have you ever considered buying a rental property, cottage, or second home? A home equity loan can help you put a down payment on another property which can help reduce (even eliminate) the mortgage you take out for that property.
Particularly if you’re interested in purchasing a rental property, this is a long-term investment to make. It’s a great way to make an income from the tenants you rent to as well as the profit you make in the future after you sell that property as well.
4. Debt consolidation
Paying back the debt you owe on multiple credit cards and loans can easily drain your wallet. Especially because credit cards usually have a high-interest rate. That is why using your home equity is a great solution for debt consolidation. You can use your home equity to pay off your debts, and then repay your home equity loan using a much lower interest rate. Depending on the size and term of your debt, you can save yourself hundreds, even thousands of dollars.
5. Emergency expenses
Life happens, and sometimes the unexpected happens. You have a large bill for car repairs or you or a family member have become sick or injured. These unexpected moments can come with a pretty big price tag, and without financial preparation can have a huge impact on your wallet. Rather than charging everything to credit cards or taking out huge loans, using your home equity is an option. Again, depending on interest rates you can save yourself a lot of money and stress by using your home equity to pay for these unexpected moments.
Do you want to access your home equity? I can help!
Whether you’re planning a beautiful home renovation or you’re looking to consolidate your debt, a home equity loan may just be the answer for you! To learn more about tapping into your home equity or refinancing your mortgage to access your equity, call me, Darren Robinson. With my years of experience as a mortgage broker and a financial advisor, I can show you what your best next steps are. Schedule a virtual meeting with me or, give me a call at 705-315-0516. I look forward to helping you make your financial goals a reality!