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While most people need to borrow money to get a house, did you know that there are also ways to use your house to borrow money? One of the most popular ways to borrow money with your home is through a HELOC (home equity line of credit).
Whether you are in a major market like Toronto or a smaller one such as Brampton, HELOCs can help you take advantage of your home equity to get the cash you need. This guide is going to take a closer look at HELOCs in Brampton and see if it is the right choice for you.
What Is a HELOC?
A HELOC in Brampton is when you use the equity in your home to borrow money from a lender. However, instead of being like a standard loan, it is a form of revolving credit so it works more like a credit card. Because of this, it can often be used as a source of funds for emergencies or unforeseen situations.
You can borrow from it when you need it, which will stop you from having to go out and get a whole new loan if you find yourself struggling financially. The lender you work with will set a maximum amount that you can borrow, and as long as you stay under the limit you can borrow as much (and as often) as you’d like.
The maximum will often depend on things like how much equity you have in the home, the value that your home has, and your remaining mortgage balance. The interest rates are generally low as your equity is up as collateral, and the interest you pay will only be on the amounts you have actually used.
The Two Phases of a HELOC
In order to get the most out of your HELOC in Brampton and use them responsibly, you need to truly know how they operate. In general, most HELOCs have two phases. There is the draw phase and the repayment phase.
The Draw Phase
The draw phase is when you are able to borrow money from the HELOC freely whenever you need it. Sometimes interest-only payments will be required, but this isn’t always the case. Some lenders might also allow you to pay off the principal during this phase.
The Repayment Phase
This phase often comes about a couple of years to a decade or so after the draw phase begins, but the exact amount of time can vary. In the repayment phase, you need to repay the money you borrowed until the line of credit is fully paid back. Of course, you won’t be able to use or access the funds any longer once you are in this phase.
Before ever applying for a HELOC, it is a good idea to understand the draw period and repayment period, on top of important factors like the interest rate and minimum payments. Being equipped with all of this knowledge will allow you to find the best option for your needs. It is important to keep in mind that these HELOCs should only be used for things that you need.
Can you use your home equity to pay off a consumer proposal?
What Are The Most Common Uses For a HELOC in Brampton?
Now that you know what they are, what are the most common uses for a HELOC in Brampton? While they can essentially be used for anything, some of the most common uses for a HELOC include:
- Consolidating your debt and getting lower rates or simplifying your monthly payments
- Using the money to add value to your home by renovating, remodelling or painting
- To make a large and important purchase that you simply can’t afford in cash
- As an emergency or back-up fund during a renovation or just for a rainy day.
These are far from the only uses for a HELOC in Brampton, as it can essentially be used for anything that you need a little bit of extra cash for. However, as when using any sort of loan or line of credit, it is important to use a HELOC responsibly. If you use a HELOC for things you don’t need or borrow more than you could afford, you put yourself in a position where you could end up losing your home or the equity you had in it.
HELOC vs. Home Equity Loan
After learning a little about what a HELOC in Brampton is, you might be able to see the similarities between them and a home equity loan. While they are similar in that both use your home equity to gain access to additional funds, there are also many differences. A home equity loan is like a standard installment loan where you will be given your money in a lump sum, and then pay it back over a predetermined schedule.
Also, with a home equity loan, you also need to borrow a larger amount and could be helped responsible for certain fees. They are often less flexible than a HELOC but are generally more predictable and simple. So which is the right choice? Well, the answer is that it depends.
If you have a large home renovation or an expensive one-time purchase, it is often better to go with a home equity loan. They are great when you know exactly how much money you need. The payments with these are consistent, which some people enjoy.
On the other hand, if you want to prepare for life’s many emergency or unpredictable situations, having a HELOC often works best. This could be if you have medical concerns, if you are a student who needs money every now and then, or if you simply want a relatively affordable source of emergency funds.
Another thing to keep in mind is that it is much easier to abuse a HELOC. Because it operates as a revolving line of credit, it can be common for people to overspend or spend irresponsibly with one. Only make purchases on credit that you are confident you will be able to pay back on time or in full.
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Good and Bad Times to Use a HELOC in Brampton
While a HELOC in Brampton is a great solution for many people, it isn’t always the right choice. There are both good and bad situations for using a HELOC. Generally, it is a good idea to utilize a HELOC if you are using the money for something that you need, for an emergency or for adding value in your life in some way. This includes:
- Adding value to your home by renovating it in some way
- Paying for your education, which improves your future earning potential
- Dealing with a medical emergency or ongoing issues
- Paying for necessities after an accident or loss of job
- Consolidating your expensive debt and getting a more affordable interest rate
If you use a HELOC for any of the aforementioned situations or scenarios, you’re generally in the clear. Unfortunately, many people use HELOCs for the wrong reasons. Some of the wrong things that many people will use HELOCs for include:
- Buying a new TV or a new car
- Using it as a source of income to purchase unnecessary things
- Using the money for a risky investment or business opportunity
If you are still confused about whether your current situation calls for a HELOC or not, be sure to reach out to an expert in your area.
The HELOC For Your Needs
Need help determining if a HELOC is the right choice for your unique situation? Loans Canada can help by matching you with a third-party mortgage professional.
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.