Home Equity Loans & Mortgages

If you’re a homeowner and have accumulated a sizable amount of equity in your home, you might be able to use it to fund a large expense, like a home renovation, a child’s college tuition, or an expensive purchase like a boat or RV.

Let’s take a closer look at how you can use your home equity to get your hands on some extra cash.

What Is Home Equity?

Your home equity refers to the value of your home minus the amount you still owe on your mortgage. Obviously, when you purchase a house, you are considered the owner. But, until your mortgage is paid off completely, your lender retains an interest in the house. Home equity is built in two ways, as you pay off your mortgage and when the value of your house rises because of the real estate market.

Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service and education platform.

How To Calculate Your Home Equity?

Home equity is calculated using the market value of your house minus the balance of your mortgage. You can get a general idea of how much home equity you have by subtracting your remaining mortgage balance from the purchase price of your home. But, keep in mind that if you want to know the official amount of equity you have built up or if you’re interested in leveraging your equity as collateral to take out a home, you will need to have your house appraised. 

Home Equity Loans And HELOCS

There are two main ways you can tap into your home equity, via a home equity loan or a home equity line of credit. 

What Is A Home Equity Loan?

A home equity loan works a lot like a secured personal loan. It is a loan that is secured against the equity in your home and is often referred to as a second mortgage. Payments are fixed and terms range between 5 to 30 years. They generally have lower rates than most credit products but usually higher than the original mortgage rate.

How Does A Home Equity Loan Work?

Like a regualr installment loan, you’ll be funded a lump-sum amount of cash that you can use according to your needs. You’ll make fixed payments with interest over a period of time, usually between 5-30 years. Interest rates are typically higher than a regualr mortgage but lower than a regualr personal loan. Moreover, they’re usually fixed, so payments are consistent and easy to budget. If you fail to make your payments, your lender can seize your property to recoup payment.

What Is A HELOC?

A HELOC — or home equity line of credit — is a type of financial program that allows you to borrow the equity in your home to access cash when you need it. When a HELOC is taken out in addition to a separate first mortgage, the HELOC is considered to be a second mortgage.  

Types Of HELOCs

There are two main types of HELOCs: those that are tied to your mortgage, and those that aren’t.

• HELOCs tied to your mortgage. A HELOC that’s bound to your home loan requires that you hold both your HELOC and mortgage with the same lender. Since the HELOC is affiliated with your current mortgage, you can borrow up to 80% of your home’s value. 
• Independent HELOCs. These standalone HELOCs are not linked to your mortgage and allow you to borrow up to 65% of your home’s value.

How Does A HELOC Work? 

Unlike a traditional loan in which a lump sum of money is provided to the borrower and is then repaid in fixed installments, a HELOC works more like a credit card. You can draw from the line of credit up to your maximum spending limit as often as you like and repay as much or as little of the withdrawn amount monthly.

In this way, a HELOC offers you plenty of flexibility to borrow against your home equity. And the money you repay can be borrowed again and again on an as-needed basis.  HELOCs typically come with variable interest rates, which means the rate on your HELOC will fluctuate with the prime rate.

How To Calculate How Much You Can Borrow Through Your Home’s Equity?

The maximum amount that you can borrow through your home’s equity is based on a few factors, including the following:

• Your home’s value
• The percentage of your home’s value that your lender will let you borrow against 
• The amount still left to repay on your mortgage

To illustrate, let’s say your home is currently worth $700,000 and you still owe $400,000 on your mortgage. If your lender allows you to borrow up to 80% of the value of your home, that means you can borrow a maximum of $560,000 ($700,000 x 80%). 

Then, subtract your outstanding mortgage amount to arrive at the amount you can borrow. In this case, that would be $160,000 ($560,000 – $400,000).

Home Equity Learning Resources

Pros and Cons of a HELOC

There are a handful of perks and drawbacks of a HELOC that you should be aware of before taking this route to get access to extra cash.

Pros:

• Competitive rates. HELOC interest rates are usually lower than they are with personal loans. 
• Easy access to funds. Once you have your HELOC set up, you can draw from your home equity as the need arises without having to repeatedly apply for separate loans. 
• Pay interest only on the amount used. Rather than paying interest on the entire credit limit, you only pay interest on the amount that you withdraw. And once you repay that money, you no longer have to pay interest on it. 
• Bad credit accepted. You may find it easier to get approved for a HELOC compared to a traditional personal loan because you already have a mortgage and a home to collateralize the HELOC. In this case, a lower credit score may be acceptable. 

Cons:

• Variable interest rates. Since the rate on your HELOC is based on the Prime Rate, your HELOC rate will increase if the Prime Rate goes up.
• Risk of overspending. If you have a tendency to lose control over your spending habits, you might find it too tempting to tap into your home equity through a HELOC to be able to cover the costs of your expenditures. This can lead you into excess debt that can be tough to come out of. 
• Your home can be repossessed. Your home serves as collateral for your HELOC. So, if you fail to repay your HELOC according to your contract terms, your lender can seize your home to recoup any losses. 
• Fees. There are fees associated with setting up a HELOC, including the cost of a home appraisal.

Pros And Cons Of A Home Equity Loan

Just like a HELOC, there are pros and cons to using a home equity loan. Based on your needs and financial circumstance, one option may be better than the option.

Pros

• Fixed Rates – With a home equity loan, your monthly payments won’t rise or fall like it would for a variable interest rate. The payments are consistent and easy to budget.
• Lower Rates – Compared to personal loans and credit cards, interest rates on a home equity loan are usually much more affordable.
• Versatile – Unlike a mortgage or car loan, a home equity loan can be used for any expense. Whether you want to renovate your home, cover an unexpected expense or make a big purchase, you can do so using a home equity loan.

Cons

• Secured – The biggest risk to using a home equity loan is the collateral. If you miss payments, the lender has the right to seize your home and sell it to recoup payment.
• Fees – When you take out a home equity loan, there are certain fees you’ll need to pay including closing fees and a home appraisal fee.
• Additional Debt – While a home equity loan allows you to tap into your home’s equity, it also means you’ll be taking on more debt. Technically, you’ll have two mortgages, as a home equity loan is secured to your home as is referred to as a second mortgage.

How To Use Your Home Equity To Your Advantage

Tapping into your home equity is a great way to gain access to the funding you need. Because the equity you’ve worked hard to build acts as collateral for the loan or line of credit you applied for, you’ll be able to access more affordable rates and often better terms.

When it comes to using your home equity to borrow, it’s always in your best interest to spend the money on something that will help you save or make more money in the future. Some of the best ways to use your home equity to your advantage are:

• Kitchen or bathroom upgrade
• New roof or windows
• A new addition
• Complete remodel
• Debt consolidation
• Add a basement suite

Cost of Tapping Into Your Home Equity

Before you take out a HELOC or home equity loan, be wary of the costs associated with this financial program:

• Appraisal fees. Your home may have to be professionally appraised in order for your lender to verify its current market value. Appraisals can range anywhere from $150 to $250.
• Title search fees. A title search will verify whether or not there are any liens on the property, and if there are, this may have to be dealt with before a home equity loan or HELOC is issued. Title searches costs vary from $250 to $500.
• Administration fees. There are admin fees associated with opening a HELOC or home equity loan, which vary quite a bit in cost from one lender to another.
• Closing fees. Closing costs range from $200 to $350 and are charged when you close your HELOC or home equity loan.
• Legal fees. You’ll need to pay for the services of your lawyer, which can run you somewhere between $500 to $1,000.

Additional Reading

Home Equity Loans For The Unemployed

Canada Home Inspection Checklist

Do You Need Extra Insurance When Renovating Your Home?

What Do You Need To Apply For A Home Equity Loan Or HELOC In Canada

To apply, you’ll need to meet a few criteria including, but not limited to: 

• Be a Canadian citizen or permanent resident
• Be at least 18 years old
• Have a mortgage that’s less than 80% of your home’s appraised value 

You’ll be required to provide specific information to your lender, such as your personal information, proof of your ability to repay the loan, and information about your home. 

Home Equity FAQs

Final Thoughts

Home equity is a unique financial tool that you can use to access cash whenever the need to cover an expense arises. But like any other type of financial program, make sure you’re financially capable of repaying what you owe according to your contact to avoid any significant repercussions.