Take out a Fairstone loan between November 17th to 30th, 2021, and you won’t have to make a loan payment until next year.
The closer you get to the urban West Coast, the higher homebuying prices will get. Alberta is no exception. While it remains one of our country’s three prairie provinces, Alberta does have a few major cities, such as Edmonton and Calgary, where general living costs, let alone mortgages are certainly more pricey than other Canadian areas. If you’re planning to buy a home in Alberta, those high prices might make you nervous. Then again, one great element about any mortgage is that you’ll be building “home equity” with every dollar you pay toward the outstanding balance.
Click here if you’d like to learn more about loans in Alberta.
Using Your Home Equity in Alberta
Home equity refers to how much value your home collects over time as you continually pay down your mortgage. You may also build some extra equity if the area where your home is located ever increases in real estate value. Once you have enough equity built up, there are certain ways you can put it to good use, such as:
- Taking out a home equity loan
- Consolidating high-interest debt
- Making repairs to your home, vehicle, or other property
- Adding renovations to your home to boost its value
- Covering other kinds of expenses
- Refinancing your mortgage
- Applying for a home equity line of credit (HELOC)
Curious about accessing your home equity in 2018? Take a look at this.
Comparing Home Equity Loans and HELOC
Two of the most popular uses of home equity in Alberta include taking out a home equity loan and applying for a revolving home equity line of credit. Since both options are sometimes referred to as “second mortgages” and feature the word “equity”, it can be easy to confuse them. However, if you’ve ever learned about credit products, the explanation is much more simple. Here are some of the key differences between both products:
Home Equity Loans
Ever taken out an installment loan or a personal loan in Alberta? A home equity loan is similar because it comes in one lump sum of cash which is linked to how much equity you’ve built up by that point. Once approved, the funds will be deposited directly into your bank account. You’ll then be given a specific payment schedule and fixed interest rate (the rates don’t change over your payment term), during which you’ll pay back the loan in divided increments. From that point, until the end of your payment term, you’ll be able to use your equity loan money however you’d like.
For a better explanation of the difference between revolving credit and loans, read this.
Home Equity Lines of Credit
While you can also use a HELOC to cover many different expenses, it differs slightly from a home equity loan. Remember, HELOC is revolving credit, rather than a lump sum of loan money. Think of it as a credit card, instead of a handful of cash. And, just like a credit card (or regular line of credit), you would have a certain credit limit that you must stick to, again based on the amount of equity available. You use up that credit however you need, then repay it as you go, all while paying an adjustable interest rate (the rate fluctuates with the Bank of Canada’s prime rate). You’ll also be given a minimum monthly payment that you can make to avoid late penalties or if you can’t afford the full outstanding balance right away.
Important note: HELOCs are secured against your home itself, so you must be very prudent by making all your payments on time and in full. If you default on too many payments (ask your lender in Alberta), you will run the risk of foreclosure, which means your home will be taken away and sold at auction to compensate your lender for their loss. You do not truly own your Alberta home until you’ve paid the mortgage entirely!
Check out this infographic to learn how much it costs to buy a house in Canada.
The Meaning of a “Second Mortgage”
As we discussed above, a HELOC is often referred to as a second mortgage, which can also be a bit confusing when you’re already in the middle of paying for your original mortgage. However, in this case, taking out a second mortgage doesn’t literally mean what it sounds like. It simply means that your HELOC holds second claim position under your current mortgage, which fits into the first claim position on the property. You can actually hold your first mortgage with one lending institution, like your bank, while operating a HELOC through a second source, like a credit union.
What’s the difference between a bank and a credit union in Canada? Find out here.
If you are planning to have one mortgage active while borrowing your home equity through a secondary lender in Alberta, be aware that you may end up paying a slightly higher interest rate. This is because, since you’re likely already paying a lot for your first mortgage, the secondary lender in Alberta is taking a larger risk by allowing you to open a HELOC with them. That being said, it is possible to place a HELOC in the first position once you’ve paid off the full original mortgage balance.
Click here to learn more about the mortgage process in Alberta.
When HELOCs Are More Beneficial Than Home Equity Loans
Despite the obvious similarities between these two home equity credit products, there are a few scenarios where a HELOC will be more beneficial than a home equity loan in Alberta(and vice versa). Here are a few examples:
Your Home Equity Loan is a Better Option When:
- You would prefer to know ahead of time precisely how much your loan will cost you and the date you’ll have to pay it by.
- You’d rather not worry about your interest rate changing over the course of your payment term.
- An emergency situation (car accident, loss of job, etc.) occurs, which you might not have the money on-hand to deal with and would be more comfortable paying back through scheduled installments.
- You are trying to eliminate a bundle of different debts all at once so that you can avoid mounting interest and late penalties.
Your HELOC is a Better Option When:
- You have recurring expenses to cover, such as car costs, educational costs, lengthy renovations, or maintenance to your home/property, etc.
- You’d prefer not to have a specific payment deadline and would rather the option of making minimum payments if necessary.
- A variable interest rate, which could drop lower when the prime rate does, sounds more appealing than a fixed rate.
- You’re trying to improve your credit score by making timely bill payments over several months or years.
Looking for more ways to improve or fix your overall credit this year? Try reading this.
How do I get cash from a home equity line of credit?
How do home equity lines of credit work?
Are there different types of home equity lines of credit?
Need an Alberta HELOC? You’ve Come to the Right Source!
Finding the right home equity line of credit in Alberta can be stressful. However, it looks like you’ve discovered Loans Canada! Apply today to be quickly connected with the best second mortgage products in Alberta.