Living near the west coast can be pricey, even in Red Deer, where wages are some of the highest in Canada. That said, being a homeowner is not without its perks. Not only can a mortgage help you purchase the home you want, but it will also allow you to build home equity with every passing year.
One thing you can do with your home equity is use it to open up a line of credit. Keep reading if you’re interested in knowing how this is done.
Home Equity Products
Home equity refers to how much your home is worth on the open market combined with how much of your mortgage you’ve paid off, minus the balance remaining. So, every time you complete a mortgage payment or increase the value of your home in some way, you will build equity. Your home can even accumulate equity during a real estate boom in your neighborhood.
Once you’ve built up at least 20% – 35% equity (this percentage may vary based on your location), many lenders will allow you to borrow from it using one of two types of credit products.
The first product you can apply for is a HELOC, otherwise known as a home equity line of credit. With this revolving credit line, you can access 65% – 80% of your available equity. Here, you’re likely to receive a variable interest rate, potentially saving money when Canada’s prime rate dips.
Depending on how much equity your home has accumulated and the lender you’re borrowing from, your HELOC can last several decades, which makes it ideal for recurring or lengthy expenses, such as home improvements, car/vehicle costs, and the price of you or someone else’s education.
Trying to find the best rate for your line of credit? Try reading this.
A Home Equity Loan
The second product is a home equity loan, which also allows you to access up to 80% of your available equity. Here, rather than having a variable rate credit line, you would be given a lump sum of money through direct deposit. That sum is then divided into installments, typically at a fixed interest rate, meaning your rate won’t change during your payment term.
Although repayment plans can be shorter than the average HELOC and fixed rates often higher than variable ones, a home equity loan can be less expensive because you can potentially be out of debt sooner. Some lenders will even allow you to make accelerated payments without penalty. This makes this product ideal if you have large or singular expenses, such as high-interest debt consolidation, new furniture or appliances, or financial emergencies.
Interested in the cost of buying a house in Canada? Check out this infographic.
First vs. Second Mortgages
Before you apply for either of the home equity products listed above, it’s important to know which mortgage position that product would fall into, as both can affect your financial situation in various ways.
If you haven’t yet completed all payments on your first mortgage, any equity product you’re approved for becomes your second mortgage. While this title more commonly refers to home equity loans, as they more closely resemble the traditional mortgage process, a HELOC can also be placed in second position. Your equity product can only be moved to first position once the balance of your primary mortgage is paid in full.
Secondary Mortgage Lenders
Although you can apply for either home equity product through your main mortgage lender, you’ll also have the choice of doing so through a secondary source, which can often help you secure better rates. That said, the opposite can occur when you have two mortgages on your property.
Essentially, the more risk you pose as a borrower, the more expensive your HELOC or home equity loan will become. Rates may be even higher with a secondary lender because, in the event that you go into mortgage default, they would be second in line to receive compensation from any debt collection procedures. Once you’ve paid off your primary mortgage, less risk is involved, so rates will be more affordable.
Budgeting For a Second Mortgage
Although second mortgages can be more expensive in many ways, they can also be extremely helpful when you’re trying to add value to your home, or if you have large, recurring, or emergency costs to cover. That said, having two mortgages also means that you’ll have two different sets of payments to budget for.
This can represent a high level of risk on your part since your HELOC or loan would be secured against the equity in your home. If you were to go into default and miss too many payments in a row, your home could be seized and possibly even sold through a foreclosure. On top of that, qualifying for a second mortgage can be tough if your lender doesn’t think you can comfortably afford all the associated costs.
Having two mortgages is a serious responsibility, so you should only apply for a HELOC or home equity loan if you have a decent household income, a low amount of debt, and plan to use the funds for necessary costs, rather than consumer goods.
Not sure if you should apply with a bank or broker for your mortgage? Look here.
Recommended Uses for Your HELOC
If you’re ready and able to afford the costs associated with your HELOC in Red Deer, then it’s time to come up with a plan of action. Remember, even a HELOC that’s in first position can still put significant strain on your finances, so it’s best to only invest your acquired financing on things that really make a difference for your living situation.
- Debt consolidation
- Renovations, repairs, or other home improvements
- Recovery from a flood, car accident, or another financial emergency
- Credit improvement (through complete payments)
- Expansion of your small businesses
- Lease or purchase of a new or used vehicle
What is negative equity? Find out here.
Ready for a HELOC? Apply with Us!
Homeownership in Red Deer is a big responsibility. However, it certainly shouldn’t be a burden. If you’re looking for an affordable and convenient way to access your home equity, don’t hesitate to reach out to the experts at Loans Canada. Simply call us today for more information or click “apply” when you’re ready to get started.