When you take on a mortgage, it feels as though you’ve taken on a large amount of debt. Although this is partly true, it’s important to remember that a mortgage is an investment. Your home holds a lot of your financial wealth, which is your home equity.
Home equity is the value of a homeowner’s interest in their home or in other words, it’s the difference in how much a home is valued at and how much is still owed on the mortgage. The equity (or value) of a house may fluctuate over time as more payments are made, and market changes happen, impacting the current value of the house as well. What’s great about home equity is that you can use this money when needed instead of taking out a traditional loan.
So, the big question is, when should you tap into your home equity and how do you do it.
Using your home equity can be a smart strategy, depending on what you’re using the money for. Using your home equity in many cases is better than taking out a traditional loan because you will more than likely be paying less in interest charges, saving you more money in the long run. In many cases, people refinance their home to access their home equity for the following reasons:
- Debt consolidation
- Home renovation
- Paying off other loans
- Buy an additional property
- Starting a business
The bottom line is that home equity is best used for projects or payments that aren’t recreational. You worked hard for your money, and it should also work hard for you.
How to access your home equity
There are a few different ways you can access your home equity. One of the main ways home equity is used in Canada is as a home equity loan. A home equity loan is when you borrow money using your home equity as collateral and there are 4 main types of home equity loans in Canada:
- Second Mortgage – as the name suggests, a second mortgage is an additional loan taken out on a property that is already mortgaged. This method is good for those looking to consolidate debt. Although the interest is higher, it is still considered low in comparison to high-interest credit cards or other lines of credit.
- HELOC – also known as a Home Equity Line of Credit, works exactly like any other line of credit. You can borrow the money whenever you want up to the credit limit.
- Refinancing – When you refinance your mortgage, you can borrow up to 80% of the appraised value of your home. The risk with refinancing your mortgage is that due to other additional penalty fees owed from breaking your original mortgage, you may end up paying more for your mortgage than you were before, but the benefit is that you don’t have to take out a second loan as you do with the first option.
- Reverse mortgages – reverse mortgages are typically used by older Canadians to fund their retirement in the event they aren’t receiving enough pension to live comfortably.
Do you have a home renovation project that you’d like to get started on? Do you have debt that you need to consolidate and think that a home equity loan is the best option for you?
With my expertise as a mortgage broker, I can help you decide if a home equity line of credit is the right move for you. Give me a call today at 780-288-0643 and let’s schedule a virtual meeting to discuss what your best options are based on your specific situation.
Tatum Neufeld, BComm
Mortgage Broker • Mortgage Tailors