Getting a Home Equity Loan vs a Second Mortgage in Ontario
Purchasing your first home is one of the most important investments you’re likely to make. Like any substantial investment, there are a number of benefits you accrue.
Aside from the stability and comfort afforded by being a homeowner, owning your home also allows you to build equity over time. You can use this equity as collateral to purchase another property or even borrow against it in the future.
This article will break down the different types of loans to help you decide which is right for you.
Why do people take out second mortgages?
Homeowners borrow against their home equity for various reasons. Some of the most common reasons include needing to borrow money to pay for major home renovations or expenses like school, vacations or weddings.
While a traditional mortgage requires a substantial down payment to act as collateral, with a second mortgage, you’re using your home as collateral.
The most common ways of borrowing against your home equity are through a home equity loan or second mortgage or by opening a home equity line of credit.
Common Methods of Accessing Home Equity
A home equity loan is different from a traditional mortgage. As mentioned, when prospective buyers apply for their initial mortgage, they’ll need to offer collateral to the bank or lenders.
However, when applying for a home equity loan, they use the equity they’ve built in their home for collateral. While this can be referred to as either a home equity loan or a second mortgage, they effectively mean the same thing: a loan has been taken out against your home’s equity.
While a home equity loan and a second mortgage refer to the same thing, there is another option commonly considered by homeowners looking to access home equity: a home equity line of credit.
There are benefits and drawbacks to both methods, and to choose which one to pursue, you’ll need to evaluate your individual situation and determine which makes the most sense for you.
Home Equity Loan/Second Mortgage
A home equity loan is a lump sum loan that uses your home as collateral. The loan amount is based on the equity you have in your home, which is the difference between the appraised value of your property and the outstanding balance of your mortgage.
Home equity loans typically have a fixed interest rate, meaning that the payments stay the same throughout the life of the loan.
- Home equity loans can be easier to qualify for than other types of loans because your home is used as collateral.
- The interest rate on a home equity loan is usually fixed, so you know exactly how much you will need to pay each month.
- Home equity loans can offer lower interest rates than other types of loans, such as personal loans or credit cards.
- Home equity loans are secured by your home, so if you default on the loan, you could lose your home.
- The interest rate on a home equity loan may be higher than the interest rate on your mortgage, depending on the market conditions at the time you take out the loan.
Home Equity Line of Credit (HELOC)
A HELOC is a revolving line of credit that uses your home as collateral. You can borrow up to a certain limit and make payments as you go, much like a credit card. The interest rate on a HELOC is usually variable, which means it can go up or down over time.
- HELOCs can offer a lower interest rate than other types of loans, such as credit cards.
- You only need to make payments on the amount of money you borrow, so it can be easier to budget for your monthly payments.
- The interest rate on a HELOC is variable, which means it can go up or down over time. This makes it difficult to budget for your monthly payments.
- Like a second mortgage, HELOCs are secured by your home, which also puts your home in jeopardy if you fail to make payments.
Comparing HELOCs and Home Equity Loans
There are several key differences between home equity loans and second mortgages. Here are three to help you compare both:
- Home equity loans have fixed interest rates, while HELOCs have variable rates.
- With a home equity loan, you receive the entire lump sum all at once. With a line of credit, you can choose when to access the money and how much you use each time.
- You can typically borrow more money with HELOC than with a home equity loan.
What to Consider When Choosing Between a Home Equity Loan and a HELOC
The type of loan that is right for you will depend on a number of factors, including your financial situation, your plans for the money, and how much equity you have in your home.
If you need a large sum of finances all at once and you have good credit, a home equity loan may be the best option. The interest rate on a home equity loan is usually lower than that of a personal loan or another type of unsecured loan.
However, if you want more flexibility in order to make monthly payments or only need to borrow a small amount of money, a HELOC may be the best choice. With this method, you only pay interest on the money that you borrowed, making it easier to manage your monthly payments.
No matter which type of loan you choose, it is important to investigate and shop around and compare interest rates before borrowing.
The Importance of Finding the Right Lender
Whether you are looking to obtain home equity or a second mortgage, choosing the right lender is essential to getting the best deal possible.
At Canadalend, we are dedicated to helping you find the best possible loan for your needs. We have a team of experienced mortgage brokers who will work with you to find the right loan and get you the best rate possible.
For more information on home equity loans and second mortgages, call one of our specialists at Canadalend today at 1-844-586-0713 or contact us online today!