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Refinancing vs. Home Equity Loans

Your house is more than just a place to live and a great long-term investment. It can also be a great source of money should you need it. Those who have lived in their homes for a number of years have probably come across the terms “refinancing” and “home equity loans”; while they’re often used interchangeably, they’re actually vastly different. What they do have in common is that they relate to accessing money using your home.

What’s the difference between refinancing and a home equity loan? When you refinance, you are simply replacing an old mortgage with a new one. Home equity loans, on the other hand, allow you to access the equity you’ve built up in your property. A home equity loan does not replace your mortgage. If you take out a home equity loan, you still need to make payments on the original mortgage.

Home Equity Loans

Homeowners who need to access money to renovate their home, buy additional property, invest, buy a car, help pay for university tuition, etc. might want to consider a home equity loan. Because the interest rates are lower and the money is secured against the property, it’s less costly than taking out a traditional loan.

One of the biggest differences between a home equity loan and refinancing a mortgage is that the closing costs are a lot higher when you refinance a mortgage. That being said, interest rates are higher for home equity loans.

Those who do not expect to live in their home for a long period of time might want to look into getting a home equity loan. That’s because you’ll pay the loan off when you sell your property and won’t be stuck with higher interest rates for very long. Since you’re not refinancing the original mortgage, you’ll be able to take advantage of reduced closing costs.

What’s the downside? Well, because a home equity loan is secured against your property, if you default on your loan, the lender will come after your house.

There are two types of home equity loans: a home equity loan and home equity line of credit (HELOC). They sound alike but are very different. A home equity loan is similar to a first mortgage (and is often called a second mortgage): you get an upfront payment that is repaid over a fixed period of time. A HELOC, on the other hand, is a revolving line of credit.

Refinancing

When you refinance, you get a new lender to pay off your old mortgage in exchange for a new one—ideally at a lower rate. If you have high interest debt, it can make a lot of sense to refinance a mortgage as the interest rates with refinancing are significantly lower than higher interest rate credit cards and loans. Consolidating these debts into a mortgage at a lower interest rate will also help save money.

If you intend to stay in your home for years to come, it might make more sense to refinance the property. If you get a loan with lower interest rates or increase the amortization period, you can reduce the monthly payments. You should also be able to recover any closing costs too.

Refinancing a Home Equity Loan

If you’ve got high-interest debt or other costs, you may want to consider rolling the home equity loan into your mortgage. While many homeowners refinance a home equity loan to unlock the equity in their home, it doesn’t mean you have to take money out of your home. You might want to refinance simply because you can find better interest rates or terms.

Or maybe you want to refinance a home equity loan to add a line of credit. For example, if the original mortgage you received was based on bad credit and your credit has since improved, refinancing a home equity loan can save you a lot of money.

Thanks to the strong appreciation in housing prices across the country—especially in Toronto, the Greater Toronto Area, and Golden Horseshoe—most homeowners have accumulated a huge amount of equity in their homes.

When it comes to refinancing a home equity loan, it’s important to shop around and see what different banks, mortgage companies, and private lenders are offering. Home equity rates will vary, and some lenders will be more suited to your needs than others. Some specialize in helping those who have bad credit, declared bankruptcy, or are self-employed.

There are a lot of different financial products out there, and homeowners need to be careful and should know exactly what they’re getting into when tapping the equity in their homes.

Canadalend.com—Helping Canadians Consolidate Debt

Whether you’re planning to make major renovations to your home, important purchase, investment, or consolidate high interest rate debt, the trusted mortgage professionals at Canadalend.com can help you refinance your home equity loan.

We’ll evaluate your currency financial position and help you determine which loan product is best suited to your needs: refinancing, home equity loan, or HELOC. With access to hundreds of different lenders, we’ll find you the right home equity loan.

To find out what your options are, contact Canadalend.com today. Or apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.

Home equity loans are simple yet are sometimes treated as complicated. It’s a type of loan that allows a person to borrow against the value of their home, and to take advantage of equity they’ve built up.

Most industry experts express that homeowners should take more advantage of home equity loans, believing it to be a viable treatment of their best asset.

Here’s some basics that are important for everyone to know.

Low Rates, Relatively Easy Approval and Potential Tax Benefits

Typically, with home equity loans you can receive a fair interest rate, especially when compared to other loans. While not guaranteed, most homeowners can get approved even if they have bad credit, because your home is strong collateral.

As well, interest on a home equity loan can potentially be tax deductible, but not in every case. This is one question you will want to ask your accountant.

Large Amounts for Borrowers and Secured Loans for Lenders

Home equity can help you access a large sum of money if you need to overcome financial difficulties. It can also help you pursue a business opportunity or to fund an education or deal with a medical emergency. These things cost money, sometimes more than you have liquid in savings.

These loans are secured loans because banks feel comfortable extending you a loan based on the equity in your home.

You can borrow with a Home Equity Loan in Two Ways

Borrowers have two options when they are approved for a home equity loan. They can receive a lump sum or it can be dispensed as a line of credit. With a line of credit the money will be made available and you only repay what you use.

The way you borrow effects the repayment plan and accrued interest.

Be Wise in how you Borrow when your Home is Involved

As with anything, there are some pitfalls with home equity loans. Since your home is involved you don’t want to borrow against it to travel or repay a credit card. It is best used in specific situations and can be incredibly beneficial in those circumstances.

It’s incredibly risky for someone to pursue selling or buying a home without a real estate agent. There’s a ton to know and a minefield to navigate through when it comes to hunting, negotiating and legalities.

All productive and effective real estate agent share certain qualities.

Local Knowledge is Key Because Every Neighbourhood is Different

Partnering with the best real estate is great but you might be better served with the best real estate agent for your specific area. The most successful real estate in Toronto might not be the best bet for your desire to buy a home in Milton.

A Personal Reference is worth a lot more than Marketing

When someone you know and trust has worked with a professional you are considering, their recommendation can be the difference maker. Anyone can write a catchy slogan on a bus shelter ad but when someone you know recommends an agent, it’s a sign that there’s at least something positive there.

A Hands-on Approach

Real estate is a client service business and shouldn’t be done by sitting at a desk. Your agent should be physically with you every step of the way from viewings to open houses to meeting you at coffee shops to go over strategy and listings. If you find yourself missing your real estate agent, then it’s probably time to find a new one.

If your Real Estate Agent has any of these Qualities, you Might want to Reconsider

If your real estate agent lacks communication skills, is hard to reach or is constantly scrambling for answers than you need to take note and possibly act. This is the biggest purchase of your life so you need their undivided attention.

If you don’t feel as if your wants and needs are being reflected or that your agent is imposing their will, you need to take note and decide if it’s time to course correct.

Above all else, you know whether you have the right agent or not and it’s perfectly fine to go with your gut. It’s about what’s right for you.

There are lots of great reasons to apply for a home equity loan. Some of the more popular ones are renovations or a medical emergency. One of the lesser known reasons that people look to a home equity loan is to buy investment properties.

Is this a good idea? It’s not a straightforward answer so let’s look at the pros and cons.

Should People use their Home Equity to Invest?

A property owned for the sole purpose of being flipped or rented can be a great investment especially in a market like the GTA. Using a home equity loan to fund this type of venture is a hit or miss proposition based on the competency of the applicant. Most industry professionals will tell you that using your home equity to fund a side business or investment is a good idea.

Pro: If you have the Right Experience and Personality then you could find Success

Rental properties can provide a steady income and even pay for themselves if you put in the proper work and buy in the right neighbourhood. If you focus on the numbers and not the emotion or delusions of grandeur you could experience a very healthy return on your investment.

Pro: One of the more Stable Markets

The housing market in the GTA has proven to be strong year over year. Very few markets can make the same claim of stability so if you’re looking for a sound investment and the chance to put in a little elbow grease than an investment property is might be your calling.

Con: Every Market has some Volatility

There’s always volatility within the market and you must be prepared for the long haul. Whether you’re flipping or renting, it’ll take time to make your money back. With all investments, a realistic approach is best.

Con: There could be Trouble if you don’t Flip or Rent Fast

Not only will you have to pay the down payment you’ll also have to cover all the costs associated with buying a home. If you can’t flip or fill it fast you might be paying for two homes which for most can be strenuous.

The best thing to do is sit down with a trusted professional and decide if a home equity loan for an investment property is right for you.