Not a lot has changed when it comes to using your home equity in 2021 although the situation this year might be totally different to previous years. Basically, the ways that a homeowner can access home equity remains as getting a HELOC, applying for a second mortgage, getting a home equity loan, and opting for a mortgage refinance.
What Is A Home Equity Loan and How Does It Work?
Any loan that uses the value of your home as collateral can be classified as a home equity loan. It is a secured loan wherein the lender will let you borrow a certain amount of money based on the value of your home equity. Payments are in installments and come with interest.
To get a home equity loan, you need to have the home that you own appraised, have a significant portion of your mortgage paid, and be in a financial position that allows you to pay back loans. With this, you can borrow up to 80% of your home equity and use the funds for anything that you want.
What Is A HELOC and How Does It Work?
A HELOC or a home equity line of credit is a revolving loan is that is backed up by your home equity. This is different from other loans as you can keep using the line of credit as you make payments or until you reach the limit.
Most HELOCs are from banks and alternative lenders. You also need to have your property appraised and have significant home equity of around 20% to 30% or more because it serves as the security. This gives you access to about 65% of your home equity.
What Is A Mortgage Refinance and How Does It Work?
A mortgage refinance is a new mortgage loan created to replace your existing mortgage. This allows you access to your accumulated home equity although you’ll be limited by the terms of the lender and your home appraisal.
Note that the required payments for a mortgage refinance will be large and that your equity will decrease. More so, you might need to pay a fee for breaking your existing mortgage.
What Is A Second Mortgage and How Does It Work?
A second mortgage is another loan taken against your home that has an existing mortgage in place. Your home acts as collateral and the new mortgage is paid on top of the existing mortgage, giving you two mortgages to pay off. Failure to pay can mean a foreclosure as your lenders will try to recoup their losses. The interest may be a bit higher than a first mortgage because the lender for a second mortgage faces a higher risk of nonpayment.
Use Your Home Equity in 2021
If you are from Canada and want to use your home equity this year, simply contact us at Mortgage Central Canada. Our offices are open for consultation and we will answer questions that you may have. We are glad to help you in these trying times.