There are several reasons people consider taking out home equity loans. Perhaps you’re thinking about doing some home renovations. Maybe you’re paying off other large financial debts such as college tuitions, car loans or credit card bills. For some, it may be because you’re paying off a large emergency expense or with longer lasting retirements and insufficient savings, you may need to take out a home equity loan in order to continue funding your retirement. Whatever the reason may be, it’s important to fully understand what it means to take out a home equity loan on your house and the risks involved.
What is home equity?
Let’s start at the beginning. Simply put, home equity is the difference between what you owe on your house and the market value of your house. As an example, let’s say your home is worth $450,000 and you still owe $150,000 on your home, you, therefore, have $300,000 in home equity. Over time, one of the greatest benefits of owning a house is the opportunity to build equity. Your home equity can increase by paying down your mortgage and if the value of your home increases so does your equity. That equity you have built can then be taken out as a loan to pay down any large financial expense or debt you may have at a much lower interest rate than the bank would offer you for a similar loan. Depending on your financial situation, you may benefit more by taking out a home equity loan as opposed to dipping into one of your savings accounts if needed.
There are three different types of home equity loans in Canada:
- HELOC (Home Equity Line of Credit) – A HELOC gives the borrower access to their home’s equity and is accessible anytime. It works very similarly to other lines of credit as there is always a certain credit limit and you are responsible for paying it back. HELOCs are typically more popular among Canadians because they make great backup funds for large projects on your home or an unexpected expense. Interest rates are usually lower for this type of loan and are easily accessible at any time for you. You do however need to have good credit and a provable income.
- Second Mortgage – A second mortgage is a second loan you take out on your house. Typically, these are for people who have low or no income and lower credit scores. If you are in a lot of financial debt, a second mortgage can help reduce interest payments. It’s normally used as a last resort to quickly pay off overdue bills or urgent financial needs.
- Reverse Mortgage – A reverse mortgage allows you to borrow up to 55% of your home’s value. You must (as well as your spouse) be 55 years or older in order to qualify for a reverse mortgage. This is a great option for retirees looking to increase their retirement funds or to help their family with large financial expenses. It’s different than a typical loan as you don’t need to have a source of income and your credit score isn’t taken into consideration. There also isn’t any fixed repayment schedule so it won’t harshly impact your cash flow.
A few considerations before taking out a home equity loan…
It’s important to understand that taking out a home equity loan (although it does have its perks) can also have its drawbacks and large repercussions if not understood correctly or repaid on time. If you’re taking out a loan (not including the reverse mortgage) you need to have a financial plan to pay back the loan. If you miss payments, you could end up losing your home. Also, you risk reducing your home’s equity value. It’s crucial to be sure that before taking out a loan on your house that you have discussed all angles of your plan with a financial advisor or a mortgage broker on how you plan on paying it back.
Want to find out if a home equity loan is the right step for you to take? I can help you out with that. As a professional mortgage broker and financial advisor, I can help you decide if a home equity loan is the best move for you to make when paying off a large financial expense. It’s important to understand and review your options carefully and review all possible repercussions. With my knowledge and expertise, you can rest easy knowing that I can help you make the best decision for you specifically so you can to reach your financial goals. Call me, Darren Robinson, at 705-315-0516 and let’s get started today!