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Recent studies have shown that average housing prices in Edmonton have been lowering gradually, which is good news for anyone who’s looking to enter the Canadian housing market today. After all, more affordable housing means more opportunity for you to become a certified homeowner.
Not only that, but buying a home also means you’ll start building home equity, which can benefit your living situation in Edmonton in many ways. One of those ways is the ability to open up a HELOC, otherwise known as a ‘home equity line of credit’.
Searching for a mortgage in Edmonton? Read this first.
Your HELOC Explained
Let’s begin with a quick lesson about home equity. The amount of equity you have correlates to your home’s appraised market value. It also refers to how much of the property you’ve managed to pay down, minus the unpaid loan balance that remains on your mortgage. So, as you pay off your house throughout the years, you’ll be building equity along with it.
You can also accumulate equity by making your home more valuable through renovations or other improvements. A real estate boom in your neighborhood might have a similar effect, as it can make the value of your property go up. Once you have around 20% equity built, you may be eligible for two different credit products.
Click here a more detailed article about building home equity.
Home Equity Line of Credit
This first product allows you to access 65% – 80% of your available equity by opening a line of credit that’s secured against it. Once approved, you can dip into it whenever you need, then pay back what you’ve withdrawn on a monthly basis, similar to a credit card or personal line of credit.
You’ll sometimes hear a HELOC referred to as a second mortgage when the full balance of your primary mortgage is not yet paid. In that case, the HELOC would be placed into second position after your original mortgage. A second mortgage product can only be put in first position when you’ve completed all your primary mortgage payments.
HELOCs can be particularly advantageous because you’ll only have to pay a variable interest rate on the amounts you’ve actually borrowed, which can save you money when Canada’s prime rate goes down. They’re also a good idea for those with lots of recurring or ongoing expenses, like lengthy renovations and car costs.
Home Equity Loan
If you’d prefer a fixed amount of credit, you can also apply for a home equity loan in Edmonton, which typically allows you to access up to 80% of your home’s appraisal value. Here, instead of having a revolving credit line, a lump sum of money will be deposited directly into your bank account. You’ll then repay the loan through installments over a payment schedule that you and your lender will have organized beforehand.
Home equity loans, therefore, are more commonly labeled as second mortgages, simply because they have a closer resemblance to the actual mortgage process. Home equity loans are often a better option if you have a singular expense to cover, home repairs (new roof, heat pump, etc.) or purchasing furniture and appliances.
Interested in how much it costs to buy a house in your city? Check out this infographic.
Watch Out For Second Mortgage Rates
When it comes to second mortgages, many Edmonton homebuyers will apply with their original lender to keep things straightforward. However, others may apply with a secondary lender in hopes of securing better rates.
Wondering why different mortgage lenders offer different rates? Find out here.
Whether you decide to go with your primary or secondary lender in Edmonton, it’s very important to understand the potential risks associated with either home equity product, considering the significant impact they can have on your finances.
Remember, if your HELOC or home equity loan does fall into second position, it’s because there’s still an unpaid balance on your primary mortgage. This imposes a higher risk on the lender, since you, as the borrower, would then have two sets of mortgage payments to keep up with, putting you under more financial strain. As the risk of you defaulting is greater, the lender is likely to charge you a higher interest rate.
Your rate might be even higher if you apply with an outside lender in Edmontonbecause, in the event that your home is foreclosed due to non-payment and sold at auction, your second lender would be last to receive any compensation for their loss.
Therefore, you should only apply for a second mortgage when you have a good household income and are absolutely certain you can handle the financial responsibility of two payment schedules. From that point on, any money you’re approved for should only be invested in necessary items and expenses. After all, defaulting on too many payments can result in you losing your asset and having to go through the foreclosure process, which can be extremely stressful and expensive for anyone involved.
Most Common Uses of a HELOC in Edmonton
As we said, unlike with your credit card, it’s best not to use your funding to shop for new clothes. Instead, be sure to only use your HELOC as a sort of rainy-day fund for the necessities.
Here’s what other Edmonton homebuyers might use their HELOC for:
- Consolidating high-interest debt
- Dealing with property upkeep and basic home maintenance
- Buying groceries and household supplies
- Paying recurring home bills (utilities, cable, internet, etc.)
- Financing tuition, books, and other ongoing education expenses
- Handling car accidents, medical issues, and other financial emergencies
Want to learn about Canada’s mortgage stress test? Check this out.
Applying for Your HELOC in Edmonton
As a homeowner, your life can get complicated, but applying for your HELOC shouldn’t be. So, if you’re in the process of mortgaging a home in Edmonton, don’t forget to speak with Loans Canada. We can set you up with the right home equity lenders for your financial situation!