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A home equity loan is a form of secured loan; the security in question is the equity in your home, which you may have because of an increase in the market value of your home over your original purchase price, from paying down your original mortgage, or from investing in your home.
A home equity loan allows you to borrow money via a lump sum, which must be repaid via home equity loan payments that occur regularly - usually monthly. These monthly payments include both repayment of the original loan amount, and the interest charged on your loan. The loan is closed out once you have made all of your repayments.Some home equity loans have a fixed interest rate, and some have variable rates; it's important you choose a loan with a structure that allows you to make each monthly payment successfully.
The benefit of a home equity loan over a personal loan or other unsecured loans is that via this type of loan you can access a lower interest rate, and potentially a larger loan amount, than you would otherwise be able to.
A home equity loan works much like a second mortgage, in that it is a loan secured against your home which must be repaid over time. In the event you default on the loan, the property used as collateral can be seized.
And much like many other types of loan, it consists of several basic steps:
Home equity financing is a secured debt against your home, so the amount you can borrow depends almost entirely on the amount of equity in your home.
Calculating your home equity is easy. Just subtract the amount you owe on your existing mortgage or on other debts secured against your home from your home's appraised value.
Since the value of your house is critical to home equity lenders, it's worth getting a professional appraisal that shows your property's current market value. Some lenders have this appraisal as part of their loan process.
There are many reasons for homeowners to take out a home equity loan, over and above their existing mortgage. The most common include:
But by consolidating debt - especially high interest debt - via a home equity loan, you can save substantially on the interest rate you pay, and pay off your debts much sooner (with good credit, many lenders will offer these loans at prime + 0.5% or 1%).
Homeowners over 55 enjoy a special option to consolidate debt and boost their income in retirement. A reverse mortgage is a popular solution that allows you to eliminate your monthly mortgage payment altogether, without leaving your home.
If you're planning to spend a sizeable sum, and you won't be able to pay it off any time soon, a home equity loan could be the ideal solution. Not only do home equity funds come with low interest rates compared to most credit cards, you can also borrow more money, and pay back what you owe at your own pace.
You could also consider tapping into your home equity when you need to pay for your child's education, fund a family wedding, or cover large expenses like medical bills.
This can make repayments less of a burden, and reduce the strain on your cash flow during tough financial times, such as during job loss.
As with all loans, a home equity loan has certain terms and costs which it is important for you to understand. These are:
Bear in mind this is a total figure, which must include your original mortgage. So you must take into account your existing debt when calculating the maximum amount you are likely eligible for.
Likewise, the higher your home equity loan credit limit, the better your interest rate will tend to be. A home equity loan interest rate of prime + 0.5% or 1% is considered decent, although some lenders may offer home equity loans at the prime rate.
Your lender might cover these for you, but oftentimes you'll be responsible for paying them yourself. In some cases, this could add as much as $1,000 or more to the cost of your loan.
Only certain lenders will be able to accept properties with second mortgages, and you may be quoted higher mortgage rates. Besides higher interest, there could also be switching costs, including higher legal fees than you'd otherwise pay when switching lender for your first mortgage.
Not all lenders offer home equity financing. That's why Smarter Loans has made it easy to find the loan option that best meets your needs and gives you the most flexibility.
Although home equity loans must be approved (like most financing), they're less risky for lenders. That means you'll usually find it easier to get approved, while also snagging an interest rate that's lower than many other loans. Current rates, for example, start at about 4.45%.
Here are a few of the most common types of home equity loan available in Canada:
If you already have a first (primary) mortgage on your house, you could opt to take out a home equity loan as a second mortgage. This will mean continuing to pay off your first mortgage at the same time you pay off the second.
Since your home equity installment loan would be paid out after your primary mortgage in the event of a foreclosure, second mortgage lenders assume more risk and their interest rates are typically higher.
A reverse mortgage is a special type of home equity loan that's available to Canadian homeowners aged 55 and older. Like the name implies, a reverse mortgage lender will make monthly payments (or a single, lump-sum payment) to you, instead of the other way around.
In exchange, they'll receive equity in your home. One of the primary benefits of a reverse mortgage is that you can access a sizeable loan amount without having to make monthly payments on it.
Apply for a reverse mortgage here!
HELOCs are incredibly popular across Canada, and although they are secured against your home's equity, they work a little differently than a standard home equity loan. That's because they work like a line of credit, rather than a lump sum loan. You can always calculate your current home equity by using our home equity calculator
Essentially what happens is that you are given access to a pool of funds, with a fixed credit limit. You do not receive one lump sum at any time. Instead you can take cash from your home equity line of credit as and when you need it, and pay interest only on the money you use.
You can also pay back (and re-borrow) the amounts you owe at any time, without a prepayment penalty. There is not necessarily a monthly payment plan with an equity line of credit; you pay back as you can. Online banking makes repayment of your balance very easy.
HELOCS usually have a variable interest rate, and like other lines of credit, they work as revolving credit - meaning that you can reuse the credit after you've paid off outstanding balances, time and again. So they work sort of like a credit card, but with credit secured against your home. This credit combined with your other forms of credit can provide enormous flexibility for uncertain financial situations.
Whether you opt for a one-time payment directly into your bank account, or a revolving line of credit, both home equity loans and home equity lines of credit are a convenient, flexible way to borrow money from your home.
But they are different in nature, so to help you choose between them, here are some of the key differences between a home equity loan and a home equity line of credit:Your home is probably your most valuable asset. That can make it a big plus when it comes to borrowing against your home's equity. You should be aware, however, that you could lose your home if you're unable to repay what you owe.
Understanding some of the pros and cons of home equity loans will help you better assess your financing options.
Similarly, using home equity debt to improve your personal finance via debt consolidation can help you get out of debt faster and for less money than you might otherwise be able to.
This can make it tough to switch lenders and get the best interest rates when it's time to renew your existing mortgage, since you might not be able to pass the stress test.
While this can be a great way to invest in a second property, it does have its drawbacks. Tying up your equity funds in another asset that's difficult to liquidate could pose a problem if you're faced with a financial emergency.
Just be aware that you may have fewer options when your credit rating is less than ideal. The lender that provides your loan, for example, will likely offer you a higher interest rate and monthly payments than they'd offer borrowers with a good credit history.
Likewise, the variable interest rates charged on home equity loans are typically tied to your lender's prime rate. If interest rates rise significantly over a short period of time, you could find yourself financially exposed.
By working with Canada's most trusted loan providers, Smarter Loans helps match you with the right lender to get the personal finance assistance you need quickly and easily.
Looking for funds to spruce up your home, cover an emergency expense, or pay off credit cards or other high interest loans? Need a secure revolving credit line?
Here are just some of the home equity financing options we can help you access when you connect with one of our partner lenders or pre-apply online:
2. We find you a lender. We'll find the most suitable home equity or mortgage refinancing loan provider for your needs.
3. You get your loan. Our partner lender will get in touch with you to process your application and get you the funds you need (often in just a few days).
First, the lender will want to assess you. To do so, they'll run a credit check and pull your credit score. They'll also likely require a home appraisal. This will help them determine the value of your property and your total equity.
After that, they'll consider approving you based on loan details like your income, credit history, equity, and debt-to-income ratio.
With banks, you'll likely be rejected if your credit score is low. If your credit score is excellent however, you'll have access to the widest variety of lenders who will offer you their best fixed or variable rates.
You may also need to show:
Alternatively, if you want to use a HELOC as a substitute for a mortgage, you'll need a down payment of 35%. You can still finance your home up to 80% of its purchase price this way, but the amount above 65% must be on a fixed term mortgage.
Because you'll owe more interest on a reverse mortgage the longer you defer payments, you may have less equity in your home when the loan comes due.Pre-Apply for a Home Equity Loan Here
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