As one of the most populated cities in Ontario, Hamilton is home to countless homeowners, both seasoned and first-timers. One of the main benefits of being a homeowner with a mortgage is that you can tap into your home equity to gain access to funding when you need it. For more information about taking out a HELOC in Hamilton, keep reading.
For everything you need to know about borrowing with your home equity, check this out.
Home Equity Defined
In general terms, home equity is a type of asset that you can build and add value to as you pay down your mortgage throughout the years. To do a basic calculation of your level of home equity, you would take your home’s total appraisal value and subtract the amount you have left owing on your original mortgage.
For example, if you’ve managed to pay off $250,000 of a home that’s worth $450,000, it means you still have $200,000 remaining on your mortgage and therefore you’ve accumulated $250,000 (just over 55%) in equity ($450,000 – $200,000 = $250,000).
Other Ways to Build Home Equity
You can also add equity to your home by making renovations or by boosting the value of your property in some other way. Your equity may even increase on its own whenever a boom in real estate demand occurs in your neighborhood.
Once your property has accumulated 20% or more home equity, most lenders will allow you to apply for two kinds of credit products; the first being a home equity loan and the second being a HELOC.
For a more detailed look at building home equity in Canada, click here.
Home Equity Loan vs. HELOC
Although the application process and principal use of these two home equity products are somewhat similar, they are quite different when it comes to their terms and conditions, so be sure to speak to a financial advisor before you apply for either.
Home Equity Loan
While every lender’s policies will vary, this product typically permits you to access up to 80% of your home’s appraisal value, minus the balance that remains unpaid from your current mortgage. Normally, the funds appear as a lump sum of cash in your bank account by direct deposit. Just like any other type of loan, you would then repay the funds you’ve borrowed through equally divided installments, often at a fixed interest rate, which won’t change over the course of your loan term.
More commonly known as a “second mortgage” because of how closely it resembles the traditional mortgaging process, a home equity loan is beneficial because you’ll have an easier time calculating and budgeting for your upcoming payments. Although repayment periods can last well over 20 years in some cases, most lenders will also allow you to make accelerated installments, thereby ending your debt faster.
All this makes a home equity loan a wise choice if you have large but temporary expenses on your plate, such as a one-time repair or addition to your home, high-interest debt to pay off at once, or if you want to purchase new appliances.
A home equity line of credit (abbreviated to HELOC) allows you to dip into 65% – 80% of your available equity. However, unlike a loan, any funds you’re approved for will appear as a revolving line of credit, which you can withdraw from whenever you need, then repay on a monthly basis.
Just like a credit card or personal line of credit, this product is beneficial because you’ll have the option of making more than one payment per month, which is good for your credit score. You would even be able to make minimum payments if you cannot afford your full outstanding balances, sparing you from any defaulting penalties.
In addition, a HELOC in Hamiton is usually accompanied by a variable interest rate that fluctuates with the Bank of Canada’s prime rate. So, if the prime rate dips, your own rate can end up lower than the average fixed-rate, potentially saving you money over time. However, the opposite will occur if the prime rate goes up.
With repayment terms being slightly longer than a home equity loan, a HELOC is often more advantageous when you have costs that reoccur or need to be financed over multiple years, such as lengthy renovations, educational expenses, and utility bills.
Primary vs. Secondary Mortgages
Before you apply for either a form of home equity product, it’s important to understand which claim position it might fall into. Essentially, if you’re still in the middle of paying down your mortgage, that mortgage will fall into the primary claim position within your credit report. If you were to be approved for a home equity loan or HELOC during that time, the new product would then be moved into the second position and would, therefore, become your “second” mortgage.
As was mentioned previously, a home equity loan is more often referred to as a second mortgage due to its similarity to the standard mortgaging process. Nonetheless, a HELOC can also be put in a secondary position, so it can technically qualify as a second mortgage as well.
Be Wary of Higher Interest Rates
Having two different credit products in your repertoire has plenty of benefits. For instance, the more first and second mortgage payments you complete, the better it is for your credit. Not to mention, handling two mortgages responsibly will open the door for future credit products, good interest rates, and more adjustable payment plans.
That said, perhaps one of the biggest downsides to a second mortgage is that your interest rate may end up being higher than you’re comfortable with. This is particularly true if you apply with a different lender than your primary mortgage.
Even if you apply for a second mortgage with your original lender, your interest rate will still be high because said lender is taking a greater risk by approving a client that already has an existing mortgage on their property. If you apply with another lender, that rate may be even higher because, if you default on your payments, they would be last in line to receive compensation from any debt collection procedures.
In other words, the only way to get your interest rate lowered is to pay off the remaining balance of your original mortgage, then request for your HELOC or home equity loan to be moved into primary position, thereby reducing the risk for your lender.
Is the lowest mortgage rates always the right choice? Find out here.
When (and When Not) to Apply for a Second Mortgage
In the end, a typical mortgage can take several decades to pay in full, especially in an expensive area like Hamilton. Unfortunately, not everyone can afford to wait that long to apply for a second mortgage. After all, you may need a HELOC or home equity loan to recover from a financial emergency, so a higher interest rate may be a small price to pay.
Then again, that higher rate can cost you hundreds, even thousands of dollars extra every year. Not to mention the biggest drawback of all; the fact that you’ll have two sets of mortgage payments to keep up with. All this can leave you with a serious lack of savings and put you in massive unmanageable debt. Defaulting on enough of your payments could even result in your home being seized in foreclosure.
To reduce this danger as much as possible, it’s best to only apply for a HELOC or home equity loan when:
- You are steadily employed and are earning a decent household income
- You plan to only spend the funds on items/events that are necessary
- You have saved up a back-up fund that’s sizeable enough to cover you in the event of unemployment or any other unexpected incident
Learn how to consolidate high-interest debt using your home equity. Click here.
The Best Ways to Use a HELOC
Remember, Hamilton, like many cities in Ontario, has a relatively high cost of living, so it’s always important to maintain a proper budget and save up as much money as you can so you don’t run into any problems. The same principle should be applied to your HELOC.
If you are planning to apply for a HELOC in Hamilton, make sure you’re not only capable of handling your upcoming payments, but that you’re also using it for costs that are essential and cannot be financed by more conventional methods (cash, credit cards, etc.).
- Ongoing renovations or additions
- Recurring debts/bills
- Tuition, books, and other school expenses
- Financing a new vehicle
- Car accidents, house floods, and other emergencies
Looking for a HELOC?
If you’ve been having trouble finding the right HELOC in Hamilton, be sure to talk to the experts at Loans Canada. We can set you up with the best mortgage and home equity lenders in your neighborhood. Contact us today for more information!