Did you know that it is possible to access the equity you have built up in your home as you have paid off your mortgage over time?
It’s true! Whether you are looking to do some home renovations, purchase a new vehicle, enroll your child in university, or consolidate your debt, having a considerable amount of cash is likely going to be key.
One way of securing that money is through a home equity loan, which makes it possible to tap into the equity you have amassed in your home while you have an active mortgage loan.
This loan could come in many forms, such as a closed second mortgage, which involves receiving a lump sum of cash that you must pay back in increments over a set period ranging from 5 to 15 years, along with interest.
Another common type of second mortgage is a home equity line of credit (HELOC). This works like a credit card, as it is a revolving loan that allows you to draw from your loan whenever you need, pay it back, and then continue to draw from it over time.
Since second mortgages are secured loans, meaning they use your house as collateral, their interest rates tend to be much lower than unsecured loans.
What effects can a home equity loan have on your credit score?
Although a second mortgage has a variety of potential benefits, it is essential to have a complete understanding of such a loan before you apply for one.
One factor that is particularly important to know is the impact that a home equity loan could potentially have on your credit score. The following are a few of the main ways that applying for and receiving a home equity loan could affect your credit score:
1. The impact of credit inquiries
Any time you apply for some type of credit, whether a credit card, a loan, or another form, it is standard practice for the creditor to perform a hard credit inquiry into your credit history. Each of these inquiries can, unfortunately, result in your score dropping.
The specific amount of points that your score will drop due to such an inquiry will ultimately depend on your credit profile. Most of the time, though, your score will only decrease by five points or less.
It is necessary to keep this in mind if you intend to get quotes from several lenders, as having multiple inquiries could substantially impact your score.
However, if you decide that shopping around for lenders is worth taking this hit, do your best to meet with these lenders in close proximity to one another, as inquiries for the same type of loan made within 14–30 days are generally classed as one inquiry instead of as several separate ones. Thus, the impact on your credit score can be kept to a minimum.
2. New credit lowers your score
Taking out a loan like a home equity loan will appear on your credit report as a new credit account. When a new credit account is added to your report in this way, it generally affects 10% of your FICO credit score, which is the most widely used credit scoring model. Most of the time, this will cause your credit score to drop.
Fortunately, as your loan ages, your score will recover over time. Still, it is good to be aware of this impending drop following the approval of your loan so that it does not come as a surprise.
3. Your credit mix will change
When it comes to credit, the ideal situation is for your credit report to show a mix of different loans and credit cards because lenders like seeing that you can successfully handle multiple forms of credit.
The variety of credit that is included on your credit profile is known as your credit mix, and this determines another 10% of your FICO credit score. If, prior to your home equity loan, your credit mix is primarily or solely composed of credit cards, adding a home equity loan will improve your mix and may even consequently boost your score.
4. Consolidating credit could be advantageous
A big determining factor in how taking out a home equity loan affects your credit is what you use this loan for. One of the most common reasons that people get such a loan is to consolidate debt.
If this is how you decide to use the money from your home equity loan, it could have a positive impact on your credit score.
Since your credit utilization, which is the amount of available credit that you use, makes up 30% of your FICO score, consolidating credit card debt and getting rid of the balances owing on your revolving credit will likely cause the score to rise.
5. Boost your credit with on-time payments
The most significant impact on your credit is whether or not you pay off your debt with on-time payments, as this makes up 35% of your FICO score. Therefore, if you continue to pay your home equity loan on time each month over the course of its lifetime, you will generate a positive payment history. In turn, this will have a positive effect on your credit score.
How Canadalend Can Help You Protect Your Credit While Securing a Home Equity Loan
If you would like to benefit from 5-star customer service while securing a home equity loan for you to use however you please, Canadalend has you covered.
Not only will you have access to great rates when you secure a home equity loan through us, but you will also have access to a team of skilled and experienced industry experts who can offer you extensive guidance and support throughout the process.
After discussing your personal needs and financial factors with you, we will do our best to find you a home equity loan agreement that will serve your unique requirements.
Unlike most big banks, we do not focus on a long list of different factors, such as your citizenship, credit history, or income level, before issuing a loan. Rather, we concentrate primarily on your home’s value and outstanding loans.
With this approach, it is much easier to speed up the loan process so that you can gain access to the equity in your home quickly. Our licensed mortgage professionals make the lending process incredibly transparent and easy to follow so that you can progress through it with complete comfort and peace of mind.
For more information on how we can help you secure a home equity loan that will meet your needs, or to learn more about the other types of loans that we offer, call Canadalend at 1-844-586-0713 or contact us here.