What Is A Home Equity Loan?
The home equity loan refers to varieties of loans where the borrower uses their home equity as collateral. In Canada, home equity loans often offer a large number of loans with little interest. It is the best option for borrowers because it’s advantageous compared to secured loans.
Also, the home equity loan has a flexible repayment option. Even if you have a low credit score, it is easier to apply for this loan because it is much better than secured loans. The conditions of a home equity loan depending on the type of loan you choose. There are two common forms of home equity loans in Canada. They include a Home Equity Line of Credit (HELOC) and a Second Mortgage.
To acquire a home equity loan is the same process as obtaining a mortgage. You can apply through online lenders, banks, credit unions, and financial institutions that offer home equity loans in Canada
Best Ways To Utilize Home Equity Loans
You can utilize your loan or line of credit to your best advantage through the following:
Home improvement
Most times, Canadians collect home equity loans to improve the outlook of their home. Apart from making your home more attractive, it could draw more interest for prospective buyers when you sell it later on in the future. You can think of a home equity loan to finance large projects like kitchen renovations and increase your home valuables.
Debt Consolidation
You can use the home equity loan to consolidate high-interest debt at a low-interest rate. Homeowners use the home equity loan to pay off some debt charges like credit cards and car loans. This home equity loan helps to reduce your monthly expenses in the long run.
If you’re having trouble paying debts you’re owing, consider securing the home equity loan to clear off those bills with high-interest rates.
Emergency expenses
If you find yourself in an adverse health situation or paying medical bills, a home equity loan helps in this regard. In a situation whereby you don’t have a plan in place about paying off this loan, it could result in serious debt in the long run. But, it is financially good to set up a home equity loan to serve as an emergency fund.
But, sometimes, you don’t need to acquire a home equity loan because of their lengthy application, which might be detrimental to a time-sensitive emergency.
Wedding Expenses
Some couples see the home equity loan as an opportunity to cover wedding expenses. Wedding loans or personal loans that some couples turn to have a very high-interest rate often. Home equity loans help to reduce or cut off the excess interest rate of personal loans.
On a general note, taking a home equity loan is economical compared to personal loans.
Business Expenses
A home equity loan is very easy to build your Most business owners use their home equity loans to make capital growth in their business. One thing that makes the home equity loan a better option for your business is its low-interest rate compared to a small business loan.
Also, you shouldn’t apply for the home equity loan for a business you’re just starting with because you aren’t sure if the return on investment will be favorable.
College Costs
It is easier to use the home equity loan to fund your children’s college fees because the student loan rate can be too much. It is advantageous for your college fee because it has a low-interest option than collecting a student loan.
Also, it might be a great risk to take the home equity loan to fund your children’s college fees. In a situation whereby you fail to repay the loan, you might lose your home.
Factors To Consider Before Taking The Home Equity Loan
There are some considerations you should take note of before tapping into your home equity loan. They include:
- There is a limit to the amount you can borrow on a home equity loan. Lenders will calculate your loan to value ratio. If you have $300,000 in equity, some lenders won’t lend you that money. The money you can borrow depends on your credit score, financial history, and current income.
- Know how to use your home equity loan. It isn’t good to tap into your home equity loan for personal expenses like an extravagant vacation or lavish spending. If these are your reasons for applying for a home equity loan, it is highly not advisable. It would help if you used a savings plan to cover these expenses instead.
- The value of your home may decline when you borrow a home equity loan. Your home may lose value in times of economic downturn or suffer damage. If you take a home equity loan and the value of your home declines, then you end up owing more loans.
Conclusion
A home equity loan is a good option to make your financial position better and add value to your life. It is also pertinent you know that the failure to repay your home equity loan could cause you to lose your home or important assets. So, be as cautious and very prudent as you can be. You should also see a professional to ensure you’re making the right call.