July 07, 2022
Learn how you can get a home equity loan to finance your next idea
As you begin to pay down your mortgage over the years, you accumulate equity in your home, and the more you pay toward your mortgage, the more home equity you build for future use. Your equity will also rise when the value of your property increases in the housing market. And, because of that, many homeowners choose to use their equity to finance something important – it can be anything from a large addition to your home, to paying off existing car loans, or even putting yourself or your children through school. Whatever the expense may be, you can use your equity to pay it down.
What is a home equity loan and how does it work?
A home equity loan is a secured loan that uses your home as collateral. It is based entirely on the equity you have in your home, which is why it can oftentimes allow you to access a lot more money and at much more affordable rates than an unsecured personal loan. If you’ve already read our article Borrowing Against Home Equity, you’ll know that you can typically borrow up to 80% of the total equity you hold in your home. That means, if your home is worth $400,000, and you have $250,000 left to pay on your mortgage, your total equity is $150,000 and you can borrow up to $120,000.
How can I get a home equity loan?
The process of getting a home equity loan is quite simple and varies depending on the company you use. For the sake of this example, let’s see how Floria does it.
First, there are a few basic criteria that must be met:
- You must own your home
- You must be a Canadian Citizen or Permanent Resident of Canada
- You need to be at least 18 years old
- You need to have a Canadian bank account
If you meet this short list of criteria, the next step is to fill in the online application form. Once submitted, you will be contacted by one of our team members who will collect the required documents to finalize your application, and, if approved, you will be asked to meet with a notary to place the hypothec. After that has been done, the funds will be deposited into your bank account.
Ultimately, the process itself is quite simple, but that’s because Floria is designed to make your lives as easy as possible. The process does change depending on who you decide to borrow from; some might take a little longer, others may ask for different documents; certain lenders may charge higher rates, but, for the most part, it is safe to say that that is what you can expect when taking out a home equity loan.
How do I use one?
One of the many benefits of a home equity loan is that you can use it for so many purposes, but we recommend that you use them to finance larger expenses because they typically allow you to get much higher loan amounts. If you are interested to learn more about what other people are using home equity loans for, check out our blog 8 Reasons to Use Home Equity.
Some advantages of using a home equity loan
1. You can use it to increase the value of your home. A home is usually the largest asset someone owns, so why not increase its value as much as possible? By tapping into your home equity, you can get a large amount of money and use it to increase the value of your property. Remember, the more valuable your home is, the more equity you have. Let’s use an example to explain this a bit better. Imagine you own a home that is currently worth $400,000 on the market and you have $250,000 left to pay on your mortgage. You then decide to take out a home equity loan of $40,000 to renovate your bathroom and kitchen, and you expect the renovation to raise the value of your home by $60,000. Now, your home is worth $460,000 (400,000 + $60,000) and your mortgage balance stays the same, so your equity increased to $210,000.
2. You can access lower interest rates and monthly payments. Because you are securing your loan, lenders will offer you a lower interest rate than an unsecured loan. In Canada, secured loans from private lenders can start at around 8.99% interest, while unsecured loans can go as high as 40% annually. You can also get much more affordable payments, because of the low interest and longer durations that are offered. Home equity loans can extend up to 20 years, and you are typically able to choose how you want to repay them, through either monthly or semi-monthly payments. This gives you the opportunity to choose a payment plan that fits your budget so that you don’t need to burden yourself with meeting payments.
3. You can access higher loan amounts. As you continue to build equity in your home, you can borrow higher amounts against that equity. As you continue to make your monthly mortgage payment, you build more ownership in your home and can therefore borrow higher amounts.
Some disadvantages of using a home equity loan
1. You may need to pay fees before you can borrow money. Lots of lenders charge very high fees for appraisals, loan processing, closing costs, extensions, NSFs, and so on. It is always a good idea to ask your lender what fees they charge so that you don’t get caught off guard. If you don’t get the chance to ask them, everything will be detailed in your loan agreement.
2. Using the funds for an investment purpose comes at your own risk. Using the example mentioned above, you may think that a $40,000 renovation to your kitchen and bathroom will increase the value of your property by $60,000, but that may not be the case. Ultimately, there is risk in every investment decision, so before you borrow funds to finance your next investment, be sure to have done the right research.
3. Consider that your house is placed as collateral. One of the biggest fears someone has when taking out a home equity loan is whether they will lose their house if they can’t pay the money back. The good news is that lenders are not in the business of repossessing – they’re in the business of lending. That means that almost all lenders have multiple options created to support you financially and make sure that you will never lose your house.
How will you use your home equity in 2022?
In all, the decision as to how you use your home equity loan is up to you. No matter what you choose, make sure it fits your financial situation, and get advice from as many people as you can so that you can weigh each of your options equally. If ever you’re unsure about what to do, you can always call the Floria Team at (647) 715 5300, and we will gladly assist you.