*This post was created in collaboration with Alpine Credits
There are so many benefits of being a homeowner, but perhaps one of the biggest is the equity you build.
Your home equity increases with every mortgage payment you make, as well as appreciation in value over time. Eventually, you can build enough equity to access it to help cover big expenses, like renovation projects. You can also use the money to consolidate your debt.
But you may be asking yourself the question, “how can I tap into my equity?” Luckily, we have the answer.
When Can I Tap Into My Equity?
A common way to access the equity in your home is to apply for a home equity loan or home equity line of credit. This allows you to borrow against the equity in your home and use the funds to cover various expenses or consolidate your debt.
You can generally tap into your equity when you have at least 20% equity in your home. Depending on the lender this amount may vary, but the maximum you can borrow with most lenders is up to 80% of your home’s appraised value, minus the outstanding mortgage balance.
For instance, if your home is currently worth $600,000, you must have at least $120,000 built up in equity to tap into it, which represents 20% of your home’s value. In other words, your outstanding mortgage balance cannot be any higher than $480,000.
Can I Tap Into My Equity With Bad Credit?
Typically, you need good credit to get approved for a second mortgage to access your home’s equity. More specifically, you’ll need a score that falls within the 620 to 680 range for second mortgage approval. This can be difficult for many Canadians under this credit score range.
The good news is that tapping into your home equity with bad credit is possible with the right lender. Alternative lenders like Alpine Credits accommodate bad credit borrowers looking to take out a home equity loan.
There are no stringent credit or income requirements needed to get approved with Alpine Credits. Instead, the approval decision is based on your home equity, not your income or credit history.
How Do I Tap Into My Equity?
There are several ways you can tap into your home equity:
A home equity line of credit (HELOC) is a type of credit line that is secured against your home. You can borrow between 65% to 80% of your home’s appraised value, which serves as your credit limit.
With a HELOC, You can withdraw money from it whenever you want, up to your limit. You will only be charged interest on the funds withdrawn. Once you repay what you took out, you can borrow from it again and again.
Do note, that HELOCs include a draw period and repayment period. No fixed repayment amounts are required during the draw period. Lenders usually only require interest to be paid on the money withdrawn during that time.
Home Equity Loan
Also referred to as a second mortgage, a home equity loan lets you borrow against your home’s equity. More specifically, you can borrow up to 80% of your home’s value, minus what is still owed on the mortgage.
Unlike a HELOC, which lets you borrow as much or as little as you like on a revolving basis, a home equity loan involves one lump sum deposited into your bank account. You can then use that money for a variety of purposes. The borrowed money plus interest is then repaid via installments over a set period of time.
Refinancing your mortgage involves taking out a new mortgage and replacing your existing one. The lender pays off the existing mortgage with the funds from the new mortgage, which typically has a different interest rate and terms.
A cash-out refinance is a specific type of refinancing option that allows you to convert your home equity into cash. By taking out a larger mortgage, you can access the difference between your old and new mortgage. One lump sum is deposited into your account, and the new mortgage is repaid over a set loan term with either a fixed or variable rate.
A reverse mortgage is available to homeowners at least 55 years of age. You can use a reverse mortgage to borrow up to 55% of your home’s value, minus your mortgage balance. The funds will be made available either through a lump sum deposit or installments.
Interest rates on reverse mortgages can either be fixed or variable and are generally higher than on a regular mortgage.
Things To Consider Before Tapping Into Your Home Equity
Accessing money from the value of your home can be helpful if you’re in need of a significant amount of money. But before you apply, make sure you fully understand home equity loans and the potential costs and risks associated with them.
Here are a few things to consider before you tap into your equity:
How Much Can You Borrow?
The amount you can borrow depends on the way that you’re accessing your home equity:
- Second mortgage: Up to 80% of your home’s value, minus the mortgage balance
- HELOC: 65% to 80% of your home’s value
- Refinance: Up to 80% of your home’s value, minus the mortgage balance
- Reverse Mortgage: Up to 55% of your home’s value, minus the mortgage balance
You Could Lose Your Home
Your home secures your home equity loan. This reduces the lender’s risk, which is why the rate on a home equity loan is usually lower than other types of unsecured loans.
But because the loan is secured against your equity, your home is vulnerable to seizure by the lender if you fail to make your payments and default on your loan. Not only will you have to make payments on your home equity loan, but your first mortgage payments must also continue to be paid.
As such, before you get a home equity loan or HELOC, consider the risks of getting one.
What Are the Fees?
Whether you refinance your home or tap into your home equity, there are usually a few fees associated with it, such as:
- Appraisal fees
- Title search fees
- Title insurance fees
- Legal fees
Can You Repay Your Debt?
Make sure you review your budget and finances to find out if taking on additional debt is feasible for you. As mentioned, you’ll be putting your home up for collateral, which you could risk losing if you can’t keep up with your payments. Only apply for a home equity loan if you’re certain that you can pay all your debt.
What Do You Need To Access Your Equity?
To tap into your home equity, you must meet certain criteria:
Equity Requirements – Generally speaking, you must have at least 20% equity in your home.
Income Requirements – Lenders typically want to verify that you have an adequate income to cover your home equity loan payments, so you may need to show proof of reliable employment and a healthy income. However, if you apply with alternative lenders like Alpine Credits, approval is based on the equity in your home, not your income or credit.
Credit Requirements – Banks typically require good credit. However, as mentioned, alternative lenders like Alpine Credits accept all types of credit, including bad credit. If you’re not sure what your credit score is, be sure to check it for free using Loans Canada’s Compare Hub.
Being a homeowner comes with a lot more than security, flexibility, and a roof over your head. By owning a home, you have the unique opportunity to build equity. Both through appreciation and regular mortgage payments. Even better, at some point, you’ll have enough equity to use for life’s big expenses. Tapping into your home equity is both a benefit of being a homeowner and a serious financial decision. That’s why it’s important to choose the right home equity product based on your unique needs.