What Home Equity Can
Do for You
Many Canadians use their homes
as a way of building equity. Home equity can give homeowners the financial flexibility they want
but currently lack. With home equity, paying for renovations, a new car,
vacation, a wedding, etc. can become a lot easier while increasing your net
worth. This has made the mortgage industry open up new means of easily
accessing equity for homeowners.
Types of Home Equity
Using your home equity can help to
reduce debts and monthly mortgage payments for homeowners. There are two types
of home equity loans: fixed-term loans or a line of credit (HELOC). A fixed-term
home equity line of credit gives borrowers a lump sum in one go that can be
paid back in monthly installments at a fixed interest rate, which generally
takes somewhere between 10–15 years. This option is sometimes called a second
mortgage. A home equity line of credit is more similar to a credit card as it
gives borrowers access to money when they need it, as long as they pay off the
loan like a credit card. Borrowers need a down payment for a home equity line
of credit and should be aware that the credit has an adjustable interest rate
that often coincides with the mortgage interest rate. Essentially both options
allow homeowners to use their mortgage as equity to acquire funds.
Home Equity Interest
Comparatively, the interest on your
first mortgage is lower than the interest when using fixed-rate home equity or
a HOCEL but it is still lower than credit card interest, which is what makes home
equity attractive. For this reason home equity is often used to pay off
outstanding debts such as credit card balances. Sometimes the interest is even
tax deductable when it’s correlated with a business or investment.
Home equity is calculated by subtracting
the amount owed on your mortgage from the value of your home. For example, if
you bought a home 10 years ago for $100,000 and paid $75,000 towards your prime mortgage, you still owe
$25,000. However, in the last 10 years the house's value increased and is now
worth $500,000. Ideally, you owe $25,000 on a $500,000, which should leave you
with $475,000 in home equity. This does not mean you can actually take out a
home equity loan worth $475,000, but rather you can take out a percentage.
The Ups and Downs of Home Equity
home equity offers borrowers access to funds it is not always the right way to
go. Not all home equity lines are secure and they have a downside if the
housing market crashes along with your home's value. This scenario can leave
you paying off a HELOC even after selling your property in a bad housing
market. Even worse is that sometimes homeowners can no longer afford to pay off
their line of credit and have to default on their mortgage and lose the house.
For these reasons it is so important to make the right calculations, do
thorough research and consult with industry professionals when getting a home
equity line of credit Oshawa.