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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.
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.
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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.
There are two main ways you can tap into your home equity, via a home equity loan or a home equity line of credit.
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.
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.
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.
There are two main types of HELOCs: those that are tied to your mortgage, and those that aren’t.
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.
The maximum amount that you can borrow through your home’s equity is based on a few factors, including the following:
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).
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:
Cons:
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.
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:
Before you take out a HELOC or home equity loan, be wary of the costs associated with this financial program:
To apply, you’ll need to meet a few criteria including, but not limited to:
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
Can you tap into your home equity without refinancing?
Yes, if you want to take advantage of the equity that you’ve built up but do not want to refinance, you can take out a HELOC or a home equity loan. A HELOC is a revolving line of credit while a home equity loan is, just that, a lump sum loan. How much equity will I have after one year?
The amount of equity you’ll have after paying off your mortgage for one year depends on several factors. How large was your down payment? How large and how frequently are your payments? What percentage of your payments are going to interest vs. principle? Have you been able to make any prepayments? And finally, has the market value of your home gone up?What do I need to qualify for a HELOC?
In order to get approved for a HELOC in Canada, you will typically need to meet the following criteria: a minimum of 20% equity built up, a low debt-to-income ratio, and a healthy credit history and score. Will I need to have my house appraised to get a HELOC?
Yes. If you want to tap into your home equity using a HELOC or any other form of home equity loan product, you will need to have your house appraised. This will determine the value of your property and allow your lender to calculate how much you can borrow.What happens if I can’t make my payments?
If you cannot make your payments, you’ll risk losing your home, which is used to collateralize the HELOC or home equity loan. If your lender repossesses your home, it will be sold and the proceeds will be used to pay your lender(s). If there’s anything left over from the sale, it will be given back to you.
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.
An appraisal involves assessing the value of a property based on current market values and is conducted by an appraiser that is typically assigned by a lender. The appraisal is then used by the lender to determine whether or not to extend a mortgage to a borrower. A bridge loan is a type of short-term loan that may be used to “bridge” the gap between carrying a mortgage on an existing home and covering the mortgage for a new home. These are usually obtained when the closing dates of a home sale and purchase overlap, requiring the seller to continue paying the mortgage on the existing home before it closes while paying the mortgage on a new home. A governing body in Canada that oversees and executes several federal housing projects in relation to the National Housing Act. A cash-back mortgage allows borrowers to obtain the mortgage principal and a percentage of the loan amount in cash, which can come in handy to cover the cost of certain expenses, such as making home improvements or paying for car repairs. Rates on these types of mortgages tend to be higher compared to other home loans. A closed mortgage allows borrowers to prepay only a certain amount of the principal without being charged a prepayment penalty fee. Fixed-rate closed mortgage prepayment penalties are usually 3-months’ worth of interest or the interest rate differential, whichever of the two is greater. Before a real estate transaction closes, certain closing costs will need to be paid, which can include real estate commissions, lawyer fees, land transfer taxes, appraisal fees, home inspection fees, adjustments, and others. A conditional offer is not yet final and means that there are certain conditions that must be fulfilled by the buyer, seller, or both before the sale is considered “firm.” For instance, an offer could be conditional on the home being inspected, which the buyer must be satisfied with. A construction mortgage allows borrowers to finance the cost of construction of a new home or major renovations. Your debt ratio determines your ability to pay off a mortgage by measuring your debt relative to your income. Lenders look at debt ratios to assess a borrower’s ability to make mortgage payments. A high debt ratio means your debt load is too high relative to your income. Gross debt service ratio refers to your debt that does not include a mortgage payment, and total debt service ratio refers to your total debt including mortgage payments. A deed is a document signed by the seller that transfers ownership from the seller to the buyer. A down payment is the money that is put toward the purchase price of a home. The required down payment will depend on a number of things, such as the type of mortgage being taken out and the cost of the house. An offer goes “firm” after all conditions have been satisfied and signed off by all parties. A sale can also be immediately firm if no conditions are included. A fixed-rate mortgage means that the interest rate does not change throughout the entire mortgage term. Even if posted interest rates go up or down during the term, your rate will be locked in and stay the same until the term ends. Foreclosure is an unfortunate situation in which a homeowner loses possession of the title of their home as a result of mortgage payment defaults. When mortgage payments are missed, the foreclosure process may begin after a certain number of days have passed. In this case, the lender can take over the home under a “power of sale,” after which the homeowner may still have a chance to make good on their mortgage payments and bring their debt up to par. Otherwise, the lender may make efforts to sell the property to recover any money they are owed. A gross debt service ratio is the measure of housing-related debt relative to a borrower’s income. GDSR is a factor that lenders consider when determining whether or not to approve a mortgage application. A high-ratio mortgage refers to a mortgage in which the principal is greater than 80% of the property’s value. That means more than 80% of the home’s value must be borrowed in order to buy a home, while the down payment is less than 20% of the property value. High-ratio mortgages require mortgage default insurance to be paid. The First-Time Home Buyers’ Plan (HBP) is a government incentive program that allows first-time homebuyers to withdraw up to $25,000 from their Registered Retirement Savings Plan (RRSP) – or $50,000 in total for first-time home buyers and their partner – to buy or build a home. The full amount withdrawn must be repaid within 15 years. The equity in a home represents the value of the property, less total outstanding debt, that the owner actually owns outright. It is calculated by subtracting the total mortgage loan amount still owed by the property’s value. Using the equity in your home, you can secure a line of credit that uses the equity as collateral. The credit limit is usually equivalent to a particular percentage of your home’s value and there is a set date when the loan must be repaid. If you default on this kind of loan, the lender can repossess your home and sell it to cover the owed debt. Since there is a high risk with this type of financing, it is typically used to finance big purchases such as home improvements, education, or medical expenses. Many conditions can be inserted into a purchase agreement, including a home inspection. The home inspection allows buyers some time to have the property assessed by a professional to uncover any potential issues with the home before the buyer is obligated to complete the purchase. Interest is added to the principal amount of the mortgage and is paid to the lender in exchange for access to the funds needed to complete a real estate purchase. Interest is charged from the moment the money is received to the moment the term expires. Land transfer taxes are charged by the province in which the property is being purchased, as well as in certain municipalities. It is a type of tax that is based on the purchase price of the property, though these taxes vary by province. First-time homebuyers are sometimes exempt from paying the entire land transfer tax amount and may be eligible for a rebate. The maturity date is the date when the mortgage term ends. It is at this point that the mortgage must either be paid in full, refinanced, or renewed for a new term. A mortgage is a loan that is provided by a lender to help a homebuyer complete a home purchase. Lenders provide a certain amount of money required to cover the cost of a home’s purchase price while charging interest on the principal amount. The loan is collateralized by the property itself. The mortgage must be repaid according to the terms of the contract. If the loan amount cannot be repaid according to the terms, the lender has the right to repossess the property and sell it to recoup any losses. A mortgage broker is a professional who works on behalf of the borrower and finds the best mortgage product and lender among their network of lenders. Mortgage default insurance is designed to protect the lenders when a borrower is unable or unwilling to repay their mortgage. This is applicable to high-ratio mortgages where the down payment amount is less than 20% of the purchase price of the property and does not apply to conventional mortgages. Borrowers are responsible for this payment. A mortgage discharge is issued by the lender when the mortgage is paid off in full by the borrower. When the mortgage is fully repaid, it is discharged from the title to the property and certifies that the property is completely free from the mortgage debt Mortgage life insurance is an optional policy that borrowers may take out. It is designed to reduce or pay off the mortgage amount (up to a certain amount) in the event of the borrower’s death. A mortgage payment is the regular payment borrowers are required to make to pay off their home loan. These payments can be made monthly, semi-monthly, biweekly, or weekly, and include both principal and interest. A mortgage pre-approval involves having your credit and finances checked out before you formally apply for a mortgage once you agree to purchase a particular home. It allows you to find out how much can be afforded, how much the lender is willing to lend, and the interest rate that may be charged. Pre-approvals expire within 90 to 120 days after they are issued and are not a guarantee of final mortgage approval. The mortgage principal represents the amount of money borrowed from a lender and does not include the interest portion. Lenders typically submit a mortgage statement to borrowers on a yearly basis that details the status of the mortgage, including how much has been paid and the principal on the mortgage that still remains. The mortgagee is a mortgage lender. The mortgagor is the borrower. The Multiple Listing Service (MLS) is a database of listings where real estate professionals market properties they have for sale and search for properties for sale for their clients. The offer represents the purchase agreement that the buyer submits to the seller and that the seller can either accept, reject, or negotiate with the buyer. The offer includes the offer price, deposit amount, closing date, conditions, and other items pertinent to the transaction. An open mortgage allows borrowers to repay their loan amount in part or in full without incurring any prepayment penalty fees. Open mortgages tend to have higher interest rates compared to closed mortgages but are more flexible. The posted rate is the lender’s benchmark advertised interest rate for mortgage products offered. These are not necessarily set in stone, but may be negotiated with the lender. Prepayment is made when some or all of the loan amount is paid off before the end of the mortgage term. Most open mortgages can be paid off early without any prepayment penalty charges, but prepaying a closed mortgage typically comes with a prepayment charge. However, most closed mortgages allow an annual prepayment of anywhere between 10% to 20% without any penalty. When all or part of a closed mortgage is paid off before the end of the mortgage term, a prepayment charge may have to be paid to the lender. The prime rate advertised by a lender is typically based on the Bank of Canada’s interest rate that is set each night, which may change at any time. Property insurance must be paid on a home throughout the mortgage term. Lenders require a policy to be held on a property before they agree to extend a mortgage, and the lender must be named on the policy. This type of insurance covers the cost of any repair or replacement as a result of damage to the home from fire or other disasters. Property taxes are paid by homeowners to their respective municipalities to cover the cost of things such as police, garbage collection, policing, schools, and fire protection. The property tax amount paid is based on the property’s value and the rate charged by the municipality. A qualifying rate is the interest rate that a lender uses to assess a borrower’s eligibility for a mortgage and to calculate your debt-service ratio. When the term of a mortgage expires, another term may be negotiated with the lender. If the mortgage is not renewed, it must be paid off in full. Homeowners over the age of 55 can use a reverse mortgage to borrow as much as 50% of the home’s value to be used to pay for other expenses. Payments are not made on a reverse mortgage, but interest can accrue on the loan amount until the property is sold or until the homeowner passes away. A second mortgage may be taken out on a home that already has a mortgage on it. The funds accessed through a second mortgage from the home’s growing equity may be used to cover other expenses, such as home renovations, but they carry more risk than first mortgages. The statement of adjustments outlines the purchase price, deposit, and any financial adjustments that are required for taxes, utilities, or condo fees that have been prepaid by the seller and payable by the buyer to compensate the seller for fees already covered on the home. A survey is a plan of the property’s lot that shows the lot size and where the property boundaries and building structures lie. It will also show where any easements, right-of-ways, or overhanging structures from adjacent properties that could impact the value of the home. The mortgage term is the period of time that you are committed to your mortgage with your lender, including the interest rate. When the term expires, the mortgage either needs to be paid off in full, refinanced, or renewed, either with the same lender or a new one. The average term is 5 years, though it can range anywhere from 1 to 10 years. Title is the ownership provided to a homeowner when a property is purchased. A clear title is required by lenders before a mortgage is extended. If there are any issues with the property’s title, they must be resolved before the transaction closes. Title insurance is meant to protect lenders and buyers from issues on the title that are discovered after the transaction closes. Title issues can include title fraud, encroachments, municipal work orders, or zoning violations. If title insurance is purchased, it will be added to the closing costs. The total debt service ratio refers to the percentage of gross annual income needed to cover all debts in addition to the mortgage payments (including principal, interest, taxes, utilities, and more). With a variable-rate mortgage, the interest rate will fluctuate based on a financial index. Monthly payments could remain the same, but the amount paid toward interest versus principal could change. If rates increase, more money is paid toward interest, but if rates decrease, more money goes toward the principal. Mortgage Glossary
Terms
Appraisal Bridge Loan Canadian Housing and Mortgage Corporation (CMHC) Cash-Back Mortgage Closed Mortgage Closing Costs Conditional Offer Construction Mortgage Debt Ratio Deed Down Payment Firm Offer Fixed-Rate Mortgage Foreclosure Gross Debt Service Ratio High-Ratio Mortgage Home Buyers’ Plan (HBP) Home Equity Home Equity Line of Credit (HELOC) Home Inspection Interest Land Transfer Tax Maturity Date Mortgage Mortgage Broker Mortgage Default Insurance Mortgage Discharge Mortgage Life Insurance Mortgage Payment Mortgage Pre-Approval Mortgage Principal Mortgage Statement Mortgagee Mortgagor Multiple Listing Service (MLS) Offer Open Mortgage Posted Rate Prepayment Prepayment Charge Prime Rate Property Insurance Property Tax Qualifying Rate Renewal Reverse Mortgage Second Mortgage Statement of Adjustments Survey Term Title Title Insurance Total Debt Service Ratio Variable-Rate Mortgage
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