Most homeowners will be familiar with the concept of home equity: you take out a home equity loan, convert your equity to cash, and, voila, you have an effective way to achieve many of your financial goals. Whether it's starting a business, funding education, or investing in a property, you'll be able to do it all with your home equity.
However, is it too good to be true? In this article, we break down the pros and cons of home equity in Ontario. Let's get into it.
What is a home equity loan?
Let's start with the basics. In Ontario, a home equity loan is a second mortgage that allows homeowners to tap into the equity existing in their home. Equity is understood as the difference between your home's value and your mortgage balance.
How does the loan work? Well, it is paid out in a lump sum and remains secured by your home. The loan repayment term can range from anywhere between five to 30 years. Lenders typically have strict qualifiers for home equity loans. Some of the standard requirements can include higher credit scores and less flexibility on debt-to-income ratios.
There are two primary kinds of home equity loans:
Fixed-term loan: This is a one-time lump sum loan. It is paid back only every month with fixed and consistent payments each month.
HELOC: Home Equity Line of Credit, or HELOC, is a line of credit that provides access to funds at a competitive interest rate. Lenders typically need a 20% equity down on the home and a good credit rating as well.
Home equity loans are a popular choice because many homeowners are sitting on a gold mine. As you're paying off your mortgage, you're accruing value on your house, which can then be put to good financial use. And that's where home equity loans come in!
The Pros of a Home Equity Loan
Let us now look at some of the main advantages of taking out a home equity loan. Some of the pros include:
Fixed interest rate: Home equity loans have a locked-in interest rate, unaffected by the general rising and falling of interest. This rate will be set for the loan duration, which is extremely handy as it allows homeowners to budget accordingly.
Lower borrowing costs: Borrowing rates on personal loans, credit cards, and other lines of credit can often be high. This is because they are unsecured. With home equity loans, you'll be using your house as collateral, which results in lower borrowing and interest rates.
You can use the funds in many ways: Once you take out a home equity loan, you'll have the freedom to use the funds in virtually any way you please. Whether to finish your college degree, use it as retirement income, renovate your home, manage debt, and even cover emergency expenses—your home equity loan will have you covered. You can also use it as a starter to feed your other investments or combine your bill payments. Thus, it is an excellent option for homeowners looking for cash for a myriad of purposes.
Potentially tax-deductible: Sometimes, interest payments on home equity loans may be tax-deductible. This depends on which province you're in, but you may qualify to deduct your interest payments from your gross taxable income.
The pros of a home equity loan make it very compelling! Let's take a look at some of the cons.
Different Ways to Use Home Equity Loans
The following are different ways you can use home equity loans in Ontario:
Manage unexpected expenses: You can use home equity line loans to manage your unexpected expenses such as job loss, sudden injury, or other emergencies.
Consolidate debt: If you need to consolidate high-interest debt (such as a credit card) then a lower interest rate combined with a payment plan can help you manage it better (note: it won't completely solve your debt problem).
Property or commercial investments: Some individuals choose to use the money they get from the loan to put into investments. Make sure you assess the risk of this before doing so.
Taking out a loan of any kind is a huge decision! And with your house as collateral, this one will even be a bigger decision.
If you don't have much cash saved up, don't worry. You likely have a lot of home equity that you can use for a variety of purposes, such as the ones listed above. A home equity loan is a wise choice for such homeowners requiring the extra finances for any of life's curveballs. It's fast, easy, and less expensive than refinancing. At the end of the day, though, only you can tell if the pros outweigh the cons for this significant financial decision.
Our only suggestion is to set yourself up for success, which means going with a reputed and effective home equity loan broker in Ontario. After all, you worked hard for your home, so why not let it work for you?
At Canadalend.com, we provide a locked-in fixed rate with lower interest rates compared to credit cards. Our expert team looks at your home value and outstanding loans rather than other qualifications such as credit history or citizenship. Get started with the perfect loan today! For more information on home equity in Ontario, call Canadalend at 1-866-422-6536 or contact us here.