How to Use Your Home Equity to Improve Your Finances in Ontario
You're living inside a golden vault if you've held on to your property during this last year.
The question is, how do you get your hands on some of that money?
Canadian Bankers Association data indicates the average homeowner has about 74 percent equity. Price growth in many markets means a lot of capital to work with.
The three most common methods to access it without selling your home are listed below.
Borrow money from your home equity
To qualify for one, you must request a specific amount of cash and use the equity in your home as collateral.
If your loan provider is willing to accommodate you, you'll receive the entire loan amount at once, and then you'll make monthly payments on a set schedule at a set interest rate.
You must have enough equity built up in your home to serve as collateral. Take a look at your credit score for free and see whether any issues need fixing to get the money you need.
A home equity loan can also help you increase your home's value in addition to paying down debt or covering your child's education expenses.
Home equity loans generally have lower rates than credit cards or personal loans, so upgrading your home can add value.
Open a HELOC
With a home equity loan, you get a one-time cash injection and pay a fixed interest rate, whereas, with a home equity line of credit, you pay a variable rate.
It's a little more complex with HELOCs (Home Equity Lines of Credit).
The borrower's credit line is divided into two periods: the draw period, during which you can take cash out at your convenience until your borrowing limit is reached, and the repayment period.
In the case of repayment, both phases may extend for years. In either case, your HELOC borrowing is over after the draw period has ended.
While it's called the draw period, during that loan phase, you must make payments. Luckily, they're usually fairly manageable due to the interest-only nature of the payments.
After you start making repayments, the principal of your loan is included in your payments, which increase significantly.
That's one of the most prevalent risks of a HELOC: uncertainty. With a home equity line, payments won't be fixed, and interest rates won't be fixed, making budgeting difficult.
At under 2.5 percent, home equity lines of credit and home equity loans are hard to come by, so refinancing your home might be your best and most affordable option to access your equity.
In a refinance, you can select a new, larger mortgage to replace your current one - and make the difference in cash. A new mortgage is taken out to repay the existing mortgage and repaid in monthly installments.
With a refi, you can generally borrow up to 80 percent of the appraised value of your home.
If your home is worth $400k and your lender accepts an 80 percent refinance, you could get as much as $320k. If you still owe $200,000 on your first mortgage, you would be able to pay it off and have $120,000 in tax-free cash at your disposal.
Talk to a financial adviser regardless of how you plan to access equity. Whatever type of refinance you choose, your home is your collateral. If you fall behind on your payments, you could lose your home, and all your equity will evaporate.
Financially, owning a home can be a constant struggle. No day goes by without some major expense taking up a bit of your mind space, whether it be your mortgage, taxes, or maintenance costs.
The six best uses of a home equity loan
Although you can use your home equity in various ways, there are a few good ways to maximize your loan. Some good uses for your home equity include:
Renovations to the home
The home's value may increase, drawing more interest from potential buyers when you sell it later. Upgrades are not only beneficial to you but also the home's value.
Fees for college
A home equity loan to pay for college can be a great, low-interest option if the interest rate you find is better than what you'd get with student loans. However, it could also be riskier.
The risk is that you will lose your home if you default on the loan.
If you have a significant amount of unsecured debt with high-interest rates and you are struggling to make payments, you will likely save money each month by consolidating that debt into one with a substantially lower rate of interest.
However, you are converting unsecured debt, such as credit card debt, into debt secured by a home. That means you could lose your house if you default on your loan.
The expense of an emergency
In an emergency, if you do not have any other means to raise the necessary cash, home equity can serve as a solution.
The risk is that the application process is lengthy and may not be appropriate for an urgent situation.
Expenses associated with a wedding
Home equity can pay for wedding expenses at a lower cost than a wedding loan.
Alternatively, you can adjust your wedding celebration, save up for the wedding, and ask family and friends to contribute rather than give you gifts.
Charges related to business
If you need more capital to grow your business, you may be able to save money on interest by utilizing the equity in your home instead of obtaining a business loan.
However, if your business has not been tested, it could fail, and you still have to pay for what you borrowed - regardless of whether you earned money.
The Bottom Line
The advantage of accessing your home equity is that it doesn't force you to sell your home, take out expensive personal loans, or rack up credit card debt.
Taking out home equity debt to cover recreation expenses or monthly bills is not a good idea, but it can be lifesaving if you find yourself in a bind.
Investing in the future with home equity is also a good option. If you don't repay the loan, you might lose your home in foreclosure. So make sure to borrow at the lowest possible interest rate.