Home equity loans, also known as second mortgages, are a popular way for homeowners to borrow money by using their homes as collateral.
Typically offered in the form of a lump sum loan or a line of credit, a home equity loan can be a great option for Canadian homeowners who need to borrow a large amount of money for a variety of reasons; whether it be for home renovations, paying for a child’s education, debt consolidation, or other purposes.
With that being said, there are many questions that homeowners may have about home equity loans. Understanding the answers to these questions can help them to make informed decisions about whether a home equity loan is the right choice.
Let’s go over some of the most frequently asked questions about home equity loans:
What is a home equity loan?
A home equity loan is a loan that is taken out against the equity in a home, which is simply the value of the home minus the amount still owed on the mortgage. For example, if a home is worth $500,000 and the mortgage balance is $250,000, then the homeowner has $250,000 in equity. Homeowners can borrow against this equity by taking out a home equity loan.
How are home equity loans provided to borrowers?
Home equity loans are generally offered as either a lump sum loan or a line of credit known as a HELOC (home equity line of credit). A lump sum loan is a one-time loan that is to be paid back over a certain period of time via fixed monthly payments. On the other hand, HELOC is a more flexible loan that allows homeowners to borrow money as needed, making necessary payments on the loan as required.
How do I know if I qualify for a home equity loan?
To qualify for a home equity loan, you must have sufficient equity in your property in addition to a good credit score. Lenders will also consider the borrower’s income, debt-to-income ratio, and employment history when evaluating their eligibility through the loan application process.
What can home equity loans be used for?
Home equity loans can be used for many different purposes, including covering the costs of home renovations or improvements, consolidating debt, paying for a child’s education, and more. However, lenders may have restrictions on how the loan proceeds can be used, so it is important to clarify this with your lender before taking out a home equity loan.
How much money can I borrow with a home equity loan?
The amount that homeowners can borrow with a home equity loan depends on several factors, including the value of their home, the amount of equity they have built up, and the lender’s unique lending guidelines. With that said, many lenders will allow homeowners to borrow up to eighty to ninety percent of the equity in their homes.
Are there risks to taking out a home equity loan?
Yes, there are potential risks associated with taking out a home equity loan. One of the main risks is the possibility of losing your home if you default on the loan and are unable to make the required payments. If you can’t make your payments and the lender forecloses on your home, you could lose your home and your equity.
This is quite a serious risk, which is why it’s critical to carefully consider whether a home equity loan is the right financial decision before you take one out (our Canadalend experts can certainly help with that).
How do home equity loans compare to other types of loans?
Home equity loans have some advantages compared to other types of loans. One key advantage of home equity loans is that they are a secured type of loan. Since these loans offer a greater level of protection to the lender, this generally results in lower interest rates for the borrower when compared to unsecured loans.
How can I calculate my home equity?
In order to estimate the amount of equity you have built in your home, simply take the market value of your property and subtract the loan amount that you owe on your current mortgage, along with any other loans secured against your home. For example, if your home is valued at $600,000 and you still owe a balance of $400,000 on your mortgage, then your home equity will be valued at $200,000.
How do I determine if I should choose a lump sum loan or a HELOC?
If you need a lump sum of money for a specific purpose, such as home renovations or debt consolidation, then a home equity loan may be the better choice. On the other hand, if you require ongoing access to funds for a variety of purposes, then a HELOC may be more suitable.
It’s also important to consider other factors, such as varying respective fees and interest rates (home equity loans typically have fixed interest rates, while HELOCs have variable interest rates that can fluctuate over time), and repayment terms (home equity loans have a fixed repayment term ranging from five to fifteen years, whereas HELOCs have a flexible repayment schedule). Ultimately, the right choice will depend on your unique financial situation and goals.
Start Using the Equity in Your Home to Your Advantage
Our mortgage lenders in Ontario have access to hundreds of different lenders and offer a wide range of mortgage solutions, such as home equity loans, that can help you finally attain the funds you have been wanting to access.