Living on a fixed income can be very difficult for a lot of Canadians, more so for retirees or those nearing retirement. Financial stress is no joke when you consider rising prices of basic needs, possible health issues with expensive treatments, and other unexpected expenses that may come up. It is no wonder that more and more homeowners are finding it necessary to tap into their home equity to help manage their financial situation.
Why Use Home Equity?
Home equity is the value that a homeowner owns in his or her home. It is computed as the difference between the home’s current market value and any existing debts on the property. As a homeowner pays the mortgage on his or her property, home equity is built larger and can be later accessed via home equity loans when needed. Homeowners may choose between a HELOC, a second mortgage, or a reverse mortgage as types of home equity loans.
What is a Home Equity Loan?
Any home loan that uses the home equity as collateral can be called a home equity loan. In Canada, home equity loans usually offer lower interest rates than unsecured loans and allow the borrower to borrow more since the loan is secured by the home’s equity. Oftentimes, a home equity loan also has flexible repayment options and are easier to qualify for than unsecured loans.
To get a home equity loan, you may apply to traditional lenders such as banks or find a mortgage professional to help you connect with private lenders. Note that loan requirements may vary widely depending on the type of home equity loan that you want to apply for. Most people apply for a HELOC or a second mortgage.
What is a Second Mortgage?
Any home equity loan taken on a home with a primary mortgage can be considered as a second mortgage. The amount that can be borrowed on a second mortgage is limited by several factors, the primary one being the value of the home equity.
For a second mortgage, the borrowed equity is given as a lump sum and paid off over a set period of time. The interest rate can vary greatly depending on the lender and the exact circumstances of the loan.
What is a HELOC?
A HELOC is a home equity loan that is taken on a loan with an existing mortgage and is granted as a revolving line of credit. With a HELOC, the homeowner can reuse the funds as it gets paid and only gets charged interest on the actual amount used. HELOCs are usually approved for people with solid income and a good line of credit.
Uses for Home Equity Loans in Canada
Most Canadians use home equity loans for debt consolidation, home renovation, and higher education. Some use it to have a more enjoyable retirement or to give financial assistance to family members who are short on cash. Some people use home equity loans to fund a business or for investment purposes.
No matter what use you may have for your home equity loan, you must make sure to borrow only from lenders who won’t take advantage of your financial predicament. If you need help securing a home equity loan, contact us at Homebase Mortgages.