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Over time, homeowners build equity as they pay down their mortgage. Their home equity increases as more payments are made on their mortgage. As the housing market fluctuates, the value of your property will also increase, thus raising your equity.

Many homeowners choose to buy something of value with their equity. An instance of this might be an addition to their house, repayment of their existing car loan, or schooling for their children. No matter what the cost may be, they will pay it off with equity.

Considering paying off your mortgage early? Here are some options.

Is there equity in my home?

As long as you’ve been paying off your mortgage for several years, you likely have some equity in your home. Equity is built as you pay down your mortgage. You will need to have your home appraised before taking out a second mortgage using your home equity. Here is how to estimate your equity if you’re just curious or want to get a general idea before you speak with your lender.

What is a good time to take out a home equity loan?

In the event that you need funds for:

• Renovating your home
• Additions or improvements to your home
• Purchase of a new vehicle
• To cover the costs of your children’s schooling
• If you are in business
• Consolidate your debts

These loans are perfect for you if you meet the requirements.

How can I access my home equity?

The following traditional methods of accessing home equity are generally available to homeowners:

• Home equity loans
• HELOC
• Mortgage refinancing
• Second mortgage

Loans for Home Equity

A home equity loan uses your house as collateral. They work the same way that every other secured loan does. Depending on the value of your home, you will be able to borrow a specific amount of money. There will be an interest charge and a fixed payment schedule.

What is the process for getting a home equity loan?

Obtaining a home equity loan requires a number of factors, such as owning a home (which must be appraised by your lender), having a significant amount of your mortgage paid out, and being financially stable enough to withstand the debt you will incur with the loan.

How do I use a home equity loan?

Home equity loans allow you to borrow up to 80% of the appraised value of the property, less what’s still owed on the original mortgage. Both mortgages must then be paid at the same time. 

A Home Equity Line of Credit (HELOC)

An equity line of credit differs from a home equity loan in a few notable ways. Because of this, you have the flexibility to use your line of credit whenever you like, and you can regain full access once the balance is cleared.

What is the process for getting a HELOC?

Banks and most traditional lenders, as well as private mortgage lenders, offer credit lines. In general, banks require that you have a high credit score to qualify. A prospective borrower should have their property appraised before applying for a HELOC to ensure that they have enough equity in their home. In order to qualify for these lines of credit, borrowers must have at least 20% equity in their homes.

What is the best way to use a HELOC?

Approximately 65% of your property’s appraised value can be borrowed with a HELOC. Nevertheless, if your lender allows you to combine your HELOC with the remainder of your mortgage, your borrowing limit will increase to 80% of the home’s appraisal value. If you keep up with your monthly payments, you will be able to borrow from your secured credit line as you please.

Mortgage Refinancing

Using a refinance loan means replacing your old mortgage with a new one. As a result, you will be able to access a portion of what you have accumulated in equity. If you wish to borrow a larger amount, you will have to meet with your lender. The important thing to remember is that you will have to make large payments and your equity will go down. 

How to Refinance Your Mortgage

Mortgage refinancing requires an appraisal of your property. Your original mortgage contract will need to be broken and a new one negotiated through either your current lender or a new lender. If you decide to refinance your mortgage to access your equity, you will be responsible for a prepayment penalty fee if you break your mortgage contract. 

Having a Second Mortgage

Second mortgages are loans taken out against properties that have already been mortgaged. A second loan can then be obtained with your house as collateral. Take care, however, when you get a second mortgage because you’ll have two mortgage payments to make. Due to the fact that your home acts as collateral, if you miss mortgage payments and the lender decides that you won’t pay them back, they have the right to foreclose and possibly sell the house.

Benefits of Using Your Home Equity

Your equity can be used to increase the value of your home. Since your home is a valuable asset, you can borrow against your equity to finance any home improvements that you might want to do. This will increase the value of your home if and when you decide to sell it.

You may be able to deduct the interest from your tax return if you decide to invest the extra money from your second mortgage loan for investments that will generate income.

However, this is not limited to home renovations or financing new properties. Some homeowners use their equity to pay for their children’s or their own education, or even to take a vacation. If you have any other debts with higher interest rates, then you can consolidate them with your equity.

Disadvantages of Borrowing From Your Home Equity

There are various fees that must be paid before you can borrow from your home equity. For example, you must pay an appraisal fee, an application fee, and legal costs before you can access the funds. Initially, variable interest rates can be cheaper than fixed interest rates, so you might choose to borrow at a variable rate. However, be aware that your interest rate may change if you make a variable rate choice.

When you use your home equity for investment purposes, you will face risks. Not only will you be subject to taxes if you use it unsheltered, there is also the possibility of losing your money if the stock market fluctuates.

Foreclosure can result if you default on your payments. If you default on your payments, then your home can be taken. You must therefore be absolutely sure that you can make regular payments before taking out a second mortgage.

What will you do with your home equity in 2022?

Ultimately, only you can decide on how to access and use your home equity. Choose the path that best fits your financial situation. Don’t make the decision before you’ve received all the advice you can, and then weigh all your options carefully. 

For more information on home equity in Ontario, call Canadalend at 1-844-586-0713 or contact us here.

Homeownership is a wonderful way to build wealth over time, but there are also other perks, including the ability to tap into your equity for large expenses. The equity in your home is equal to the value of your house less what you owe on your mortgage and any other liens on your property. It is the value of your house that you own outright.

Home equity loans and home equity lines of credit (HELOCs) can be used to access the equity in your home. Throughout this article, we’ll discuss these two programs and determine which is best for you.

What is the best way to build home equity? 

Defining Home Equity Loans

A home equity loan gives you access to the equity in your house. The funds from a home equity loan will be provided to you in one lump sum, and will then need to be repaid in fixed instalments plus interest, just like an instalment loan. You’ll also be given an exact schedule of when you must make payments.

The terms of paying back the borrowed equity vary from one lender to another. Defaulting on a home equity loan means that your home is at risk if you cannot make your payments, similar to a typical mortgage.

Based on how much equity you possess and how much your lender will loan, you can borrow a certain amount on a home equity loan. For this type of loan, you typically need at least 20% equity in your home, meaning you could borrow up to 80% of its value. You may be able to borrow more, but the interest rate will likely increase as the amount of the loan increases. 

Some pros of Home Equity Loans are that they provide funding for large expenses, and have both a fixed monthly payment that is predictable as well as a fixed rate of interest. In addition, consolidation of debt and lowering of existing debt interest rates are possible.

Cons

• You risk losing your home if you default
• Higher interest rates than HELOCs (although lower than other loan types)

When is it best to use a home equity loan?

Home equity loans can be useful in a number of circumstances. With this type of loan, you can basically use the funds however you want, although certain expenses are better than others.

Renovation Costs

An equity loan may be the best option to cover the cost of renovations. A project that increases the value of your house is money well spent. Depending on how much value is added to the project, many projects will produce a decent return on investment so that you will be able to recoup most or all of your investment.

Consolidate Your Debts

Another reason that homeowners take out equity loans is to consolidate their debt. Due to the fact that home equity loans generally have lower interest rates than typical personal loans (because your home is collateral), you can use the equity from your home to settle any other debts you have, including high-interest debts. With only one loan, you can both save money and manage your debt more easily by securing a lower rate and consolidating several loans into one.

In Case of an Emergency

If an emergency expense arises, you can always use your home equity to pay for it, such as a last-minute car repair. That said, it’s important to be careful about how you use your money. Frivolous expenses shouldn’t add to your debt load. As you’re putting your house at risk, you want to make sure you’re using the money wisely and repaying it as soon as possible.

Definition of HELOC

In the same way as a home equity loan, a home equity line of credit (HELOC) leverages the equity in the home to lend money. HELOCs, on the other hand, are a form of credit line that enables you to access a certain amount of equity in your home, much like the use of a credit card. 

The HELOC allows you to borrow against a set credit limit whenever you require additional funds. Just like a credit card, you can borrow against that available credit when needed. In addition, you do not need to borrow against it at all, and you can let months elapse between withdrawals. When you do need credit, though, it’s there for you.

Pros

• The interest is only calculated on the amount withdrawn
• You can access funds at any time
• Excellent flexibility
• Every time you need extra cash, you won’t have to apply for a new loan
• The loan has a lower interest rate because your home serves as collateral

Cons

• If you default on your mortgage, your home is at risk
• Budgeting payments is more challenging
• An increase in interest rates is possible
• Payments require self-discipline
• Lenders have the discretion to reduce your credit limit

When is a HELOC the best option?

HELOCs are not traditional loans because you cannot receive a lump sum payment that you must repay on a regular basis as is the case with conventional loans. Depending on what you want to do with the money, you can update your home, make car repairs, or even take a vacation or invest in an opportunity.

In reality, a HELOC may be a better choice for those with sporadic expenses that need a little extra help. A HELOC allows you to borrow funds at any time rather than having to apply for a new loan every so often. The only thing you need to do is to withdraw the exact amount of money needed to cover the expense and then just be charged interest on it. Your money can be accessed repeatedly once it has been repaid.

Which is better, a HELOC or a home equity loan?

According to your situation, you will choose a specific loan type. The best choice for you might be a home equity loan if you need a one-time loan to pay for a large expense, such as remodelling your home, and you like the idea of predictability. If, however, you need to borrow funds from time to time without having to apply for a new loan each time, then a HELOC might be a better option for you.

For more information on a home equity line of credit in Ontario, call Canadalend at 1-844-586-0713 or contact us here.

It can be stressful to raise the cash to finance a home renovation project, which is usually why those projects get put on hold. 

As you consider refinancing your mortgage to pay for your home renovations, be sure to reduce your outstanding credit as much as you can and pay your bills promptly before you apply so that you can get the best interest rate possible. You will be able to make small, consistent payments throughout the term of the loan instead of having to exhaust your savings. That is one advantage of refinancing your mortgage for home improvements.

What improvements will you make?

Make a list of the things you like and dislike about your home. Rethink your current lifestyle and how each room is used, and whether there is any space, you would like to improve. Refinancing your home mortgage may be the best way to fund your big home renovation projects without compromising your other financial goals. However, your improvements may not justify a mortgage refinance if they are small and more manageable.

Hire a Contractor Versus Do-It-Yourself

DIY allows you to save money, but you need to consider the complexity of a project, what tools you'll need to complete it, how confident you are with your ability to execute the project, and how important it is to your home. 

Whenever possible, connect with friends/family who has recently renovated and ask them for recommendations based on your needs. Compare quotes from different contractors to ensure you're getting the best deal. Make sure you choose the right contractor (from a skillset or even personality perspective) before you start the renovation project to avoid a lot of extra stress.

Renovation Benefits

Renovating a home can be stressful, but the result should be fulfilling. A new main bedroom, a brand new bathtub, or new kitchen countertops all deliver a unique sense of excitement and can significantly grow your home equity. Most renovations will increase the value of your home, increasing your home equity and helping grow your wealth.

Renovations: Return on Investment

As well as investing in your dream home, completing home renovation projects will add value to your house. The first time you buy a home is typically the largest investment of your life, so renovations that increase its value always make the most sense, especially if you use refinancing to pay for it. When deciding whether to stay put until your kids graduate from college or if you plan to live in the house for the foreseeable future, you should consider the return on investment of each home renovation project that you take on.

After Refinancing

When your home undergoes a major renovation, its value will increase. Refinancing after this may sound nice, but you may not be sure if it's a good idea. If the right circumstances exist, refinancing a mortgage after a home renovation can be quite advantageous. Whether you decide to refinance depends on what your goals are. 

Here are a few things you might want to keep in mind when considering refinancing and if you should do it before or after renovations.

Cash-Out Refinancing

A cash-out refinance occurs when you refinance your mortgage for a higher amount than what is owed on the home, but less than its total value. The reason some homeowners choose this method is to get cash from their home equity and/or a lower interest rate on their mortgage. 

The difference between the value of the old loan and the new loan will be paid to you in cash. You can use this for whatever you want, including funding renovations before they start, or after they are completed.
 

Consider the value of your house after renovations are complete. Compare this with your loan balance to determine how much equity you may have available after renovations. The cost of refinancing is high, and lenders will only allow a percentage of the home's value to be borrowed. So ask yourself, is there enough equity in your home to fund the renovation work?

Secondly, interest rates need to be compared. The average personal loan interest rate is significantly higher than loans that are secured with home equity. 

How much will you save in interest by paying off the personal loan and increasing your mortgage balance? In addition to those savings, there will be closing costs associated with refinancing. Calculate which approach saves the most money.

Cash-Out Refinancing Requirements

You and your house must meet a few specific requirements before you can consider a cash-out refinance. The credit score you'll need to be considered for such loans is around 620, but the exact score you'll need will vary depending on the type of loan and the amount of money you're borrowing.

Having a certain amount of equity in your home will also be a requirement. Your lender will require a property appraisal if you are refinancing. The amount of equity in your home is determined by subtracting the loan balance from the appraised value. You typically need between 15% and 20% equity, although the minimum requirement varies by lender.

As part of your refinancing application, your debt-to-income ratio will be considered. You calculate this by combining your recurring monthly debt and dividing it by your gross monthly income. You'll typically need a debt-to-income ratio of 50% or less, although lenders will vary.

Refinancing to Remove Private Mortgage Insurance

Your loan might also be eligible for PMI refinancing, so you don't have to pay PMI anymore. Refinancing will remove the need to pay for PMI and likely get you a lower interest rate, helping you reduce your monthly expenses significantly. PMI is required for borrowers who can’t submit a down payment of 20% or more. 

Depending on the loan type, it may be possible to remove PMI without refinancing the loan. To find out the home's current market value, you need to get an appraisal. Check your loan documents to determine if PMI can be removed or if the loan needs to be refinanced.

Refinancing After Renovations: More thoughts

It is common for mortgage decisions to be influenced by various factors. Essentially, interest rates and cost are the two most important factors to consider when refinancing. Both up-front and down the road costs are covered, along with savings. Making realistic calculations can help you make better decisions about financing your home by looking at the big picture.

For more information on mortgage refinancing in Ontario, call Canadalend at 1-844-586-0713 or contact us here.

Mortgages can make you feel like you've taken on a lot of debt when you purchase a home. The truth is that you should also consider the value of your new home along with the amount you paid for it to get a clearer picture of your finances. As the value of your home roughly equals the value of your mortgage debt, your overall wealth has not changed significantly.

Home equity is a useful way to assess how much wealth homeowners have in their properties. So how does home equity stack up, and for what purposes is it useful? No matter how you utilize your home equity, homeowners need to grasp the concept.

How does home equity work?

Equity is the personal wealth you hold in your home. To calculate your home equity, take the current market value of your home, then subtract any loans owing on it, such as your mortgage. Your home equity equals its full market value if you don't owe any money on your home.

Home equity is a useful way to evaluate the wealth you have built in your home, but most people use it when they want to borrow. In the case of a home equity loan, you can borrow against your built-up equity to get the funds you need. Common home equity loans in Canada are second mortgages or home equity lines of credit (HELOC). Here are some more details on home equity loans and what you can do with them.

Here’s How to Get Started (An Example of How to Calculate Home Equity)

For example, say your house is worth $500,000. If you had to put down $100,000 to purchase your home, you would have a mortgage of $400,000. The following items will not be included in your calculations for simplicity: land transfer taxes, GST/HST, mortgage default insurance, etc. 

How to Calculate Your Home Equity

If your home's worth $500,000, and you subtract your $400,000 mortgage, you are left with $100,000 of home equity. 

Now consider if a decade from now you reduce your mortgage balance by $100,000 to $300,000, and the value of your home has grown by $100,000 due to a strong real estate market. Here is how your equity is calculated: $600,000.00 (home value) - $300,000 (outstanding mortgage) = $300,000 (home equity).

Your home equity is not strictly based on how much your mortgage was paid off because it changes as the value of your home changes. Even though paying your mortgage directly increases your home equity, the real estate market in your area also affects your home equity. If the average price of a home in your area goes up by 10%, your home equity has just grown by 10%. Additionally, even if you keep paying off your mortgage, your home equity can also decrease over time, especially if market conditions are leading to reduced home values in your area.

How do home equity loans work?

Home equity is often used as collateral for home equity loans in Canada. Any loan that uses your home equity as collateral is a home equity loan. In many instances, home equity loans are used for large, one-time purchases such as university tuition fees, remodelling the house, or paying for medical care. In contrast to an unsecured loan, a home equity loan results in a lien placed on your house by your lender. If you cannot make your payments, your lender can take control of your home and sell it to get repaid.

A home equity loan will usually have a maximum amount that can be borrowed. This is often a percentage of your home's appraised value, usually around 80%. Your home equity loan percentage will vary based on the type of loan you use. The four most common home equity loans in Canada are listed below:

Second Mortgages

A second mortgage is what we call a home equity loan, and it is exactly what it sounds like. You can borrow part of your home equity as cash in addition to your primary mortgage. The total mortgage amount cannot exceed 80% of the market value of your house.

Compared to regular mortgages, second mortgages carry much higher rates. Second mortgage lenders fall below primary lenders in the case of a default because they are considered lower priority lenders. Consequently, second mortgage lenders are exposed to a greater level of risk.

Home Equity Line of Credit (HELOC)

You may also hear the term HELOC or home equity line of credit bundled with your primary mortgage. Rather than a lump sum of cash, the lender sets up an account you can withdraw from during the term of your mortgage. This account allows you to remove an amount at the beginning of your term, but your total credit available cannot exceed 65% to 80% of the total value of your home.

When you withdraw funds from a HELOC, you must repay the interest accrued monthly. When you use a HELOC, you remove the funds as cash rather than using them for purchases, like with a credit card. However, the rates on a HELOC are lower than those on a credit card since it is a secured loan.

Refinancing Your Mortgage

You can also access your home equity by refinancing your mortgage. Your mortgage lender will let you borrow more money when you refinance. You may borrow up to 80% of your home's total value. Your new mortgage rate may be higher than the one you paid before. Refinancing does not require you to take out a second loan.

Reverse Mortgages

Reverse mortgages can also be considered home equity loans as a specialized product. Reverse mortgages are typically used to fund retirement by elderly Canadians who lack the pension or the cash to live comfortably.

Those over the age of 55 can borrow up to 55% of their home’s total value through reverse mortgages in installments or a lump sum. The borrower does not have to make payments on a reverse mortgage until the loan is due, which occurs when the home is sold, or the borrower dies. Repayment of the loan is usually made from the proceeds of the home’s sale. A reverse mortgage will compound interest at a higher rate than both a regular mortgage and a home equity line of credit.

Accessing the Equity in Your Home

Equity in your home is only a measure of where you have assets. This is crucial since it shows you the sometimes hidden value you have locked inside your house. When you need a loan to make a major purchase or pay off debt, your home equity may be your biggest asset. To make informed financial decisions, you need first to understand what home equity is and how you can borrow against it.

For more information on home equity in Ontario, call Canadalend at 1-844-586-0713 or contact us here.