Why People Take Out Home Equity Loans
People use housing loan funding for the following reasons:
- To make home upgrades – expand their living space or improve their kitchen or bathroom (2 of the most significant areas in the house.)
- To make home repairs, such as updating wiring for computers, adding the latest in smart appliances, or fixing leaks in pipes.
- To pay off sizable debts, making them a source of alternative debt repayments.
- To make large purchases – items that are difficult to get, such as major appliances.
According to Investopedia, equity loans can be paid in one lump sum or by a home equity line of credit or HELOC. Before we delve further into how home equity loans can help you pay bills or expenses, we need to define home equity.
Equity is the difference between the value of a house and the amount owed by a borrower on a mortgage. For example, if your house is worth $200,000 and you owe $100,000 on your mortgage, you can take out equity loans Canada funding, based on your home’s equity of $100,000.
How Equity Increases
The equity in real estate can increase in one of two ways:
- By paying down your mortgage, remitting a mortgage payment each month
- When your home’s value increases.
If you take out a housing loan based on your home’s equity, you could lose your home if you cannot meet the payments. Therefore, the loan amount limit is based on how much you have invested in your house and how much the lender can give to you based on the LTV or loan-to-value ratio. That means you usually cannot obtain a loan for the total equity in your home when you take out a home loan that covers a home equity lump sum or home equity line of credit (HELOC).
What is the LTV?
The LTV ratio represents the difference between the amount of the loan and the real estate’s current market value. This helps the lender assess if lending a homeowner money if feasible before approving equity loans Canada financing, home improvement loans, or home equity loan poor credit financing. Loan-to-value ratios are fairly simple to figure. All you need to do is divide the loan amount by the current appraised value of your real estate.
For instance, if a lender allows you to receive a housing loan Canada funding for $180,000 on your house, which is appraised at $200,000, you would divide $180,000 by $200,000 to arrive at an LTV of 90%.
Here is a visual representation: $180,000/$200,000 = the loan-to-value ratio (LTV), or .90 = 90%.
A Tip for the Homeowner about Getting a Home Improvement Loan
If you use an equity financing housing loan for making home improvements, it can positively impact the value appraised for your real estate. Therefore, it is always a good idea to check with a real estate professional or an appraiser before you make any home improvements. In most cases, the current economic climate can negatively affect your home’s value regardless of the home improvements you make.
The Social Housing Finance Corporation (SHFC) in Canada strives to make housing affordable for lower-income buyers. This gives people a chance to eventually put their money into a housing loan or second mortgage that supports home equity loans Canada funding.
Even home equity loan poor credit borrowers have used home equity loans Canada funding to buy investment properties. By taking this step, buyers can use the equity of a second mortgage or home loan to buy another real estate property.
Buying Investment Properties Using Equity Funding
If you use home equity loans Canada financing to buy investment properties, you can realize some notable advantages:
- Because you can enjoy more liquidity, you can increase your down payment for an investment property. As a result, you have more money to use for investment real estate by taking a lump sum payment. If you can increase your down payment, you can lower your loan amount and payments interest.
- Because a loan amount is secured against home equity loans Canada products, the interest rates are much lower, in most cases, than for other loans. Unfortunately, this includes home equity loan poor credit financing as well.
Types of Home Equity Loans
Housing Loan Refinancing
You can also secure a home loan to refinance your home, borrowing up to 80% of your property’s appraised value. From this amount, you deduct:
- The mortgage balance
- Your total HELOC amount, if applicable
- Any other loan amounts secured against your property
You can take out a home loan refinancing amount through:
- A second mortgage
- A home equity line of credit (HELOC)
- A line of credit or loan secured with your home
The interest rate for the refinance will usually be different than the interest rate on your first housing loan or mortgage. You may also have to pay a second mortgage loan insurance payment.
Administrative costs on a refinancing housing loan Canada product include:
- Title search
- Appraisal fees
- Legal fees
- Title search
If you take out this type of home loan, the lender may change the terms of your first mortgage.
Getting a Second Housing Loan or Second Mortgage
If you choose to get a second home loan or second mortgage home loan Canada funding, you can borrow 80% of the appraised value of your property minus the balance of your first mortgage.
The housing loan is secured against the equity in your property. While you pay off this second home loan, you still have to make payments on your first mortgage. Although the interest rate is attractive on this type of home loan, you can lose your home if you cannot make your payments. If this occurs, the house is sold to pay off both mortgages, with the first housing loan paid first.
Like a refinance, you still have to pay administrative fees if you take out a housing loan in the form of a second mortgage.
Getting a HELOC
Consumers who take out a home loan in Toronto and Ontario can enjoy low HELOC rates Toronto financing and affordable HELOC rates Ontario funding on their housing loan packages. A HELOC works like a traditional line of credit. A homeowner can take out money from their HELOC when they need the money and pay it back and borrow on the loan amount again. The HELOC is secured against your house. You also need to add administrative costs when taking out a HELOC home loan.
Getting a Reverse Mortgage Housing Loan
If you take out a reverse mortgage housing loan, you can borrow up to 55% of your home’s appraised value. You must be at least 55 years old in Canada to qualify for this loan. Administrative costs apply as well to reverse mortgage housing loan Canada financing.
Pros and Cons Taking a Home Equity Loan
- An equity housing loan is given in a lump sum of cash. This loan form comes in handy if you need to pay a one-time expense, such as a kitchen remodel or wedding. Equity home loans also come with fixed rates, making it easy to know what you will pay beforehand.
- HELOC offers an excellent way to obtain emergency or home improvement loan funding when you need it. They also come with fewer closing costs, and they usually feature variable interest rates, although some lenders may offer a fixed rate of interest for a specific length of time.
- Most equity housing loan lenders offer home equity loan rates in Canada at prime + 0.5% to 1%. Just check out the numbers for your location.
- If you need a small lump sum of cash, such as $10,000, don’t opt for equity loans Canada financing. These housing loans come with administrative fees and closing costs. Therefore, it is better to look elsewhere. If you don’t pay back the amount, you stand to lose your house.
- You have to pay the same fees as a first mortgage, including origination costs, loan processing fees, closings costs, and appraisal fees.
Equity Home Loan Terms – What You Need to Check
When applying for an equity housing loan, you need to check the following:
- The costs to set up home loan Canada funding
- The interest rate
- Shifting costs can affect your future payments, especially if the loan carries a variable interest rate.
What Documents Do You Need?
To set everything in motion for your equity housing loan, you need to provide the following documents:
- Bank account information
- Statement of assets or investments
- Credit report information
- A pre-approval letter, if applicable
- Added sources of income, if applicable
The amount you can get for equity housing loan Canada funding depends on:
- A home’s age
- Property value
- The LTV after the equity housing loan is funded
If you live in a major city center, such as Ontario or Toronto, you can get more money for your loan versus living in a remote area.
Applying for Home Equity Loans
Take a look at your credit score first
make sure you know what it is so you have room to negotiate. At this point, you can also check for inaccuracies in your report so you can correct them. Canada’s reporting bureaus Equifax and TransUnion must annually provide 1 free credit report.
Review your debt-to-income (DTI) ratio
Whether you get home equity poor credit financing or are seeking a regular equity home loan, it helps to know this metric, as it tells a lender your payback risk on the loan. For instance, if your monthly income is $5,000 and $2,500 goes toward paying your debts, your DTI is 50%. A lender seeing this percentage may not be too enthusiastic about lending you money. Your DTI should not surpass 35%. If your DTI is too high, you need to reduce it before taking out this loan.
Figure out how much equity you have in your home
Subtract the amounts owed on your mortgage from the total value of your real estate. For example, if your home is worth $400,000 and you have $100,000 left to pay on your mortgage, your available equity is $300,000. The Financial Consumer Agency of Canada only allows you to borrow 80% of your home’s value against equity. Therefore, you could receive $300,000 in equity if you had no liens.
Make sure you have at least 15% to 20% equity in your home before applying for a loan. For example, on $500,000, you should have accumulated at least $75,000 to take out an equity home loan. Before applying for the loan, have your house appraised, obtain income verification, and agree to a credit check.
Frequently asked questions
How much can I borrow for an equity home loan?
You can borrow 80% of your home’s equity. You just need to make sure you have at least 15% equity accumulated in your real estate.
Can I Get a Home Equity Loan with Bad Credit?
Yes, there are lenders who deal primarily with borrowers who have bad credit who wish to apply for an equity home loan. Usually, you need a credit score of at least 620.
Who Is Eligible to Apply for an Equity Housing Loan?
If you have built up at least 15% equity in your home, have a source of income to repay the loan, have a low debt-to-income ratio, and a credit score of at least 620, you usually can get an equity home loan without too much difficulty.
What Is the Difference Between a Home Equity Loan and a Mortgage?
A mortgage is the funding you take out on a house so you can build equity in the real estate so you can apply for an equity housing loan. Therefore, a home equity loan is often taken out as a second mortgage on the house. You are responsible for both the payments on these types of funding.
Get the Most from the equity you’ve accumulated in your real estate. If you want to invest in real estate or make home modifications, you can make it happen by taking out an equity home loan in Canada.