Understanding HELOCs – The Pros and Cons of Home Equity Line of Credit

Understanding what a HELOC is can be simplified, which is what we aimed for in this write up. A HELOC stands for Home Equity Line of Credit, a type of second mortgage that allows homeowners to access as much as 80% of their home equity in the form of revolving credit.

Most people apply for a HELOC for funding home repairs or home renovations so that they can further increase the value of their home. This is a smart move as long as you’re sure that you have the capacity to pay because failure to do so can result to you losing your home.

How Does A HELOC Work?

The easiest way to remember how a HELOC works is to think of it as a credit card backed by your home’s equity. With a HELOC, you will be given a spending/borrowing limit and you can borrow against it as often as needed, repay, and borrow again. This means that a HELOC can give you flexibility and freedom in ways that other home loans cannot.

A key information to remember about HELOCs is that they have variable interest rates. The lender will start with an index rare that can go up and down based on many factors. Factors include your credit profile, local economy, etc.

What a HELOC Means for Your Credit Score

HELOCs are often treated by financial institutions as installment loans rather than revolving lines of credit. This means that borrowing your entire HELOC credit limit can impact your credit score the same way that maxing out your credit card can. This also means that you’ll have a temporarily lower credit score once your HELOC is approved.

Pros and Cons of HELOCs

Even in view of the above, there are still many reasons to get a HELOC. Your HELOC might even be tax-deductible if used in specific ways such as improving your home. Other reasons to get a HELOC include needing a new car, having to fund a wedding, consolidating loans,  and paying for college.

Some people may be better off avoiding a HELOC if having it can make them lose their home. Examples are if you are unemployed or not sure if you can pay as failure to pay can result in you losing your home. For situations like this, looking into other types of loans could be the better option. Other reasons not to get a HELOC are if the fees cannot justify the amount you want to borrow or if you are on a very tight budget as of now and additional expenses will just mean more debt.

Home Equity Loan VS. HELOC, Which is Better?

Whether a Home Equity Loan or a HELOC is better for you depends on a lot of factors. One thing of huge significance that you must look into is how much do you want to borrow and need asap. A Home Equity Loan will give you a lump sum that you must pay in installment whereas a HELOC will allow you to reborrow even though you’re still repaying what you initially borrowed. Both are smart ways to tap home equity but one comes with a fixed interest rate (and fixed loan) while the other comes with variable payments and interest (and can be used like a credit card). Talk to us to discuss which one could be the smarter choice for your financial needs!

Getting a Home Equity Loan or a Line of Credit is bound to come with challenges. This is why it pays to arm yourself with knowledge and contact mortgage professionals with a proven track record to help you with your HELOC application. Contact us today if you have questions!

 

What You Need to Know About Getting a Home Equity Loan

With the steadily rising home prices at present (more so in key cities), it isn’t far fetched that you’re probably sitting on a huge equity especially if you’ve been paying your mortgage for about 10 years or more. Tapping into your home equity by using a home equity loan can give you a huge advantage in paying off high-interest debts and affording some expenses without having to sell your home.

Do you know that approximately 10 million homeowners will take a home equity loan between 2018 to 2022 as predicted by a TransUnion study? That’s double the numbers from 2013 to 2017! What better time than now to understand how equity loans work and find out what you need to know in order to get one?

Know Your Credit Score

Your credit score is a key factor in determining whether your loan will be approved or not, so finding out your credit score is a must more so if you want to really plan out your options just in case a line of credit or a home equity loan may not come into fruitition.

Find Out How Much Debt Do You Have

The current debt that you have may become a hindrance to your securing a loan. Although a lot of people get a home equity loan for debt consolidation, wanting to do the same may not sit well with some lenders. Lenders lend you money so that they can get interest in return. They know they won’t be getting any if your existing debts are eating up 43% of your income or more.

Determine Your Equity

Your equity will let you know about how much you can tap by getting a home equity loan or a line of credit. Do this after the initial steps above. To simplify, you need to have an estimate of your home’s current value and subtract how much you still owe from that. Reduce the answer to 80% of your numbers and that will be the maximum a lender is probably going to lend you. Plan around that accordingly to avoid surprises and determine if the effort of filing and fees will be worth it.

Why Are You Getting A Loan?

Assess why you are getting a loan and what you can do besides applying for a home equity loan. Find out what are the types of home equity loans and determine which will fit your needs and goals better. Do you need a huge lump sum payable in the next 5 to 15 years? Then a home equity loan is the right option for you. If what you need is extra funds for repeated expenses, a line of credit can help ease your financial burden for about 10 years.

Want to talk with Canadian mortgage experts about ways to use your home equity in the future? Talk to us and we’d be happy to walk you through the various details of applying for a home equity loan as well as the benefits of home equity loans.

 

10 Smart Tips to Build Home Equity

Building one’s home equity is one of the most searched terms by homeowners these days as more and more people are becoming aware of how important it is to invest in their home. Below are 10 smart tips on how you can build home equity.

Increase Your Mortgage Payments

Making larger mortgage payments per month means that you’ll be able to pay your mortgage sooner by building equity faster. The more monies that actually go into the principal, the bigger your equity becomes.

Choose High Value Home Improvement

Smart home improvement choices increase the value of your home thereby also driving up your home equity. Choose home improvement projects that have a higher expected value than what you spend on it and you’ll be in good hands.

Support Changes that Increase Home Price

Anything that can drive up your home’s value will also increase the equity. Examples are better infrastructure and amenities in the neighbourhood, a new park, a new train station, or schools nearby that rank high. Support local improvements in your neighbourhood to indirectly increase your home’s market price and your home equity.

Start with a Bigger Down Payment

The bigger the downpayment you put in, the lower will be your loan-to-value ratio and the better interest rates you’ll get. Low interest means being able to pay off your mortgage sooner while building home equity faster.

Shave Your Mortgage Balance

Paying your mortgage bills on time each month means that you’re paying towards the principal of your mortgage (if it is not an interest-only loan). Any amount that goes towards your principal is going into building your equity.

Opt for a Biweekly Mortgage Payment

Paying your mortgage every 2 weeks means paying it off faster and building your equity in the process. This option also has a lower interest rate so more of your payment goes into the actual mortgage instead of just the interest.

Invest in Maintenance

Keeping your home in the best shape possible will mean that you’ll either retain or grow the value. Doing that directly translates to building home equity.

Choose a Shortened Mortgage Term

Refinancing at a shorter mortgage term will increase your payments but you’ll also save on interest aside from being able to build your mortgage faster.

Improve Your Curb Appeal

Making your home look good will give it a higher market value, therefore increasing your home equity. Landscaping, better lighting, some flowers, and an inviting front door can work wonders!

Avoid Repeated Refinancing

Building equity is not just about increasing it but also retaining it. Repeated refinancing will suck your equity dry, not something you’ll want to do when you’re trying to build it.

Want to consult with experts about the best ways to use your home equity in the future? Contact us and we’ll be happy to talk to you about using your home equity for a loan and building your assets.

Turning Your Mortgage Into Assets

Not many are aware that a home mortgage can be turned into an asset builder with the right mindset and know-how. Most people view their mortgage as an obligation or a money pit, not seeing the fact that paying mortgage is similar to building a huge savings fund.

The above is true because the more a homeowners pay towards their mortgage, the bigger their equity becomes. Equity can be turned into cash that can be  used for further growing one’s assets without having to sell one’s home. Below are the common ways of accessing home equity.

Get a Second Mortgage

Do you know that a second mortgage can get you access to as much as 80% of the home equity you’ve built up? That is quite a substantial amount that can be funneled to finance major home renovations (that can drive up your home’s value) or perhaps spend for a much-needed large expense (such as debt consolidation) that can improve your overall finances.

Getting a home equity loan (another term for a second mortgage) may prove to be quite challenging if you do not have good credit.Professional mortgage brokers can help you get one from other lenders if banks decline. The most important thing to remember is that applying for a second mortgage means having two mortgages instead of just one and that both have to be paid on a monthly basis.

Get a Home Equity Line of Credit (HELOC)

Just like a second mortgage, a HELOC is a loan secured by your property but instead of a lump sum, you’ll be given a line of credit that you can use for a specified length of time as long as you do not exceed the approved ceiling amount.

As much as 65% of a home’s value can be tapped for a HELOC. Payment is usually just for the interest for a period of time and once that time is up, the repayment must be done. A HELOC is perfect for paying recurring big expenses such as medical treatment or university tuition.

Get a Mortgage Refinance

A mortgage refinance is a way to overhaul your current mortgage contract and convert it to a mortgage that more manageable for you while also giving you access to your home equity.

Penalties might be incurred for certain reasons and so a refinance isn’t for everyone unless refinancing will result to significant savings in the long run. It is best to talk this through with a mortgage professional to ensure that you’ll be making the right financial decision.

Get a Private Loan

80% is usually the highest percentage of tappable equity you can get access to by going through traditional lenders. If you are in need of more than that, you might be able to get access to as high as 90% of your home equity with a private lender more so if your property is in a desirable location and in good shape.

Are you thinking of tapping your home equity to fund possible investment opportunities? Talk to us at Mortgage Central Canada and we’ll be more than happy to explore possible options for you. Be it about getting a mortgage loan or the things you must be aware of before getting a home equity loan, feel free to contact us soon!

 

Comparing Rates – Home Equity Line of Credit in Canada

Getting a Home Equity Line of Credit in Canada means tapping into the equity you’ve built in your home through a line of credit. It is a way of utilizing the value of your home that you truly own. Note that it only sounds similar but is not the same as an unsecured line of credit.

HELOC Explained

A Home Equity Line of Credit is a type of revolving loan that is secured by the equity of your home. It is not the same as a home equity loan because a home equity loan is a one-time loan of your home equity that will have to be paid back in full before you can use it again.

A HELOC can be reused again and again as long as you don’t exceed the ceiling amount within the time agreed for your HELOC. Interest rates for a HELOC are more manageable as well because only the exact amount withdrawn gets computed for interest. This means that if your HELOC has a ceiling of $100,000 and you only used up $1,000, you only have to pay interest for the $1,000 you used. As you pay back that $1,000, your ceiling goes back to $100,000. Think of a HELOC like a credit card with a high spending limit that is tethered to the equity of your home.

HELOC Interest Rates

Interest rates for a Home Equity Line of Credit has been made a little bit higher since the Bank of Canada increased its key interest rate to 0.75% on July 12, 2017. This is still easier to manage than interest for credit cards which are more than 10X higher than that.

Those who have a HELOC can expect that their variable interest rates will be a little less predictable but ultimately they will still end up saving upwards of a few hundred dollars a month in interest as compared to more traditional loans.

How to Get a HELOC?

Applying for a HELOC may be a bit tricky if you’ll be doing it on your own or will be approaching big institutions to get one. Requirements vary by lender and some lenders (such as banks) can have very strict requirements.

If you are self employed, have variable income, have a non-perfect credit history, or have other debts, going the bank route may not be the best option for you. A good option is to apply for a Home Equity Line of Credit to private lenders or smaller lenders with the assistance of professional mortgage brokers to ensure that you’ll get higher chances of approval and that all your bases are covered.

If a HELOC is not for you, you can also look into a home equity loan or second mortgage, a private mortgage, or even home refinancing. The key is to ensure that you’re talking to the right people and that you really do your due research to determine what is right for you.

Care for an estimate of rates before you apply for a Home Equity Line of Credit or other possible ways to help you manage your finances better with a loan? Contact Mortgage Central Canada today!

Introduction to Debt Consolidation in Canada for Retirees

Living on a fixed income can be very financially stressful with the ever increasing cost of everyday living. Are you aware that Canadians over 65 have been getting more in debt lately? This data was shared in a September 2017 report by Equifax Canada and could be a significant factor why more retired Canadians are turning to taking loans for debt consolidation to help them with managing their finances.

What is Debt Consolidation?

Debt consolidation is a way to reduce the amount of money you pay for interest on a monthly basis by turning multiple loans into one that typically comes with lower interest as well as more convenient single-bill monthly payments. Would’t it make your life a lot easier if you only have one loan bill to pay instead of several?

Debt consolidation with a home equity loan will allow you to accomplish the above while making use of your home equity in a smart way!

Why Consolidate Debt?

Debt consolidation in Canada is done for many reasons which include the following:

Get rid of the stress associated with paying payday loans.

It is not a secret that elderly Canadians go for payday loans to get by when they have unexpected bills. The problem is that they usually end up taking another payday loan the next month to try to make it until the month after because of high-interest.

Paying overdue bills

Unpaid bills can severely damage credit score and accrue penalties or fees, not to mention that they can be very stressful. Paying overdue bills with the use of debt consolidation loan can help you regain financial stability faster.

Manage other loans better

Manage high-interest loans such as some lines of credit, personal loans, and the like by paying them off and saying goodbye to having to pay their rates per month. Imagine saving money on interest and instead, your money actually going towards the payment of your debt.

Eliminate credit card debt

Credit card debt has a tendency to accumulate and get even bigger as the interest gets added up to the total monthly. Paying them off is a smart move.

Get to own your expensive purchase outright

Be it a car or a state-of-the-art home addition, buying things on credit or amortization basis can wreak havoc on your finances if not kept in check. Paying for them with a debt consolidation loan means you won’t have worry about future bills and getting to own your prized purchase right away.

Be able to afford more things in life

Because debt consolidation can save you hundreds of dollars per month in terms of interest saved, you’ll be better prepared to handle unexpected expenses with your new savings or even save up for a dream vacation. That’s called making money work for you!

Looking for a way to reduce financial stress? Debt consolidation might be the right financial solution for you! If you own your home and willing to talk about ways to tap your home equity, contact us and we’ll be happy to discuss your options!

 

Is It Wise to Get a Second Mortgage?

Getting a second mortgage isn’t as simple as marching to a bank and telling lenders that you want to take a loan against your home equity. Although a second mortgage is just defined as a loan against the equity you’ve built up for your home, getting one is a complicated process that can result to you losing your home if you’re not careful. You should only take a second mortgage if you’re sure that you can handle the terms and that the risks will be worth it for you.

Why Get A Second Mortgage

Most people apply for a second mortgage to finance projects that they don’t have the cash for, such as an expensive home improvement project or extensive home repairs. Some do so to fund big expenses such as a dream wedding or vacation. There are also people who take a second mortgage to save money in the long run, such as when the money is used to consolidate loans with a high interest rate – effectively converting them to a low-interest single loan that is easier to handle.

How a Second Mortgage Can Help You

Whatever your reason is for trying to get a second mortgage, you need to understand how a second mortgage works to ensure that you end up helping yourself by getting it.

Know that a second mortgage gives you a one-time set amount that you have to pay on top of your first mortgage. The payments are a fixed amount monthly and is set until you’ve fully paid off your loan. The downside is that failure to make payments as agreed can lead to your losing your home to foreclosure.

How to Apply for a Second Mortgage

Getting a second mortgage follows a process that is similar to getting a first mortgage. There will likely be an appraisal as part of determining your home equity and then you connect with a lender or a bank to begin the paperwork.

Banks generally take a long time to evaluate your details to determine how much they can lend you. A private mortgage lender might be a better option if you’re not traditionally employed or if your credit score isn’t as good as banks requires it to be.

Is it Wise to Get A Second Mortgage?

Getting a second mortgage shouldn’t be your first financial option when you need cash. Ask yourself if it is possible to simply save up for the huge expense you have to fund. Try to see if your loans can be consolidated some other way. Try to see where you’ll be financially in the future to determine if you’ll be able to pay or whether you’ll be risking going homeless.

Weigh all the pros and cons before making up your mind to apply for a second mortgage. Try to find if there are any other ways to finance your needs. Once you’re sure you want to get one, don’t hesitate to ask for professional help to get the best terms possible. You need to make sure that getting a second mortgage will have a lot of benefits for your situation for it to be a truly wise  decision.

If you feel that you should consult with mortgage experts before you get a second mortgage, do it! Contact us and we’ll be happy to discuss your concerns with you.

Household Lending Tightened Due to New Mortgage Rules

New mortgage rules made household lending a bit trickier for the first quarter of 2018, shared Bank of Canada. This development regarding the OSFI mortgage stress test that started in January led to more Canadians going to loan sharks and to private lenders because they can’t qualify for a bank mortgage.

Survey Results

A survey by the Bank of Canada’s financial institutions showed that the tighter household lending conditions for the first quarter of 2018 is linked to the new mortgage rules. The survey usually just report on business loans but have recently included household lending.

The Bank of Canada added that the tightening in mortgage lending resulted from changes to Guideline B-20 (about the underwriting standards) which primarily affected non-price conditions for HELOCs (home equity lines of credit) and low-ratio mortgages. The tightening also affected price conditions for mortgages because the spreads charged to borrowers increased together with mortgage rates.

These developments may be a preview of what other changes will take place. Canada’s biggest lenders are saying that it is still too early to tell what other impacts are in store, a sentiment shared by Dave McKay, president and chief executive officer of the Royal Bank of Canada.

HELOC on the Rise?

The Bank of Canada’s survey shared that the demand for low-ratio mortgages and HELOCs experienced an increase during the survey period. It should be noted that the new B-20 rules regarding having a stress test for uninsured mortgages may also affect low-ratio mortgages because they fit the criteria for uninsured loans.

The survey also shared that there are increases and decreased in demand affected by regulatory changes that were reported by institutions. The figures could have been due to expectations of higher interest rates as well as borrowers having placed an application prior to the implementation of the B-20 changes. These are about the same findings reported in March in connection with the Bank of Canada’s rate-setting decision wherein people pushed to pull forward before the implementation of new mortgage guidelines and other related policies.

The BOC said that the survey respondents also expect that the current quarter will reflect a decreased demand for HELOCs and low-ratio mortgages. It noted that the demand for such tailed off after regulatory changes were introduced late 2016.

Business Lending Developments

The survey found that overall business lending conditions eased slightly during the surveyed period. This was driven by increasingly intense competition for corporate borrowers as the demand for business credit increased in the survey period.

The questions used for the business lending and the household lending portions of the survey reflect each other and the respondents were 18 financial institutions. They were asked about their lending practices, demand for credit, as well as changes noted from the prior quarter.

Not sure about how the developments shared will affect your existing mortgage or plan to apply for a new one? Contact us at Mortgage Central Canada and our professional mortgage brokers would be happy to assist you with your mortgage concerns regarding the latest mortgage news.

 

What is Home Equity? And How You Can Use It!

Home equity is a great asset to have. It is computed as the difference between the home’s market value and the sum the homeowner still owes. A large home equity is built over time as the homeowner is able to pay mortgage. It is largest when the homeowner is totally debt-free.

Understanding Home Equity

With the above said, home equity is the percentage of the property that the homeowner truly owns. It is the value of the property asset that the homeowner can use because any mortgage left unpaid is ‘owned’ by the lender.

Say you bought a $500,000 home and placed a $100,000 down payment on it with the remaining $400,000 in mortgage. This means that you ‘truly’ own 20% of your home’s value at this point. As you pay your mortgage, the percentage that you ‘truly’ own increases, more so when property values go up.

Does  this mean that the lender owns 80% of your home in the beginning? It would look like that but technically you own your home all along only that the house is your collateral for the loan that you take to buy it.

What does the lender gain in this set-up? Well, you pay for interest rate. The lender may also end up owning your home if you fail to pay according to terms set up and agreed by both your parties.

How to Build Home Equity

You can build equity by paying off your loan and improving your property so that it gets a higher market value.

Your equity will increase as you pay off the balance in your loan. You have to ensure that you’re paying more than just the interest and that you’re paying towards the principal. This way, you build equity over time.

Your equity will also increase during surges in the real estate market or when you take on home improvement projects that has a positive effect on home value.

How to Use Home Equity

Like any other asset, you can tap your home equity when in need. You can do this by getting a home equity loan or a HELOC. You can also use the equity you’ve built when you sell your current home to buy another one that’s better suited to your needs.

Another possibility is to use your home equity to fund your retirement by getting a reverse mortgage. This will allow you to use your home equity like a savings fund. You get to stay in your home and not have to sell it to enjoy the equity.

The most popular ways to use home equity is by applying for a HELOC or applying for a lump-sum home equity loan. Both have pros and cons and are good solutions for needing a large sum of accessible cash. What’s best for you will depend on several factors such as how much cash you need, your ability to pay, and for what purpose you’re taking the home equity loan for.

Do you want to use your home equity but still unsure whether you want to apply for a HELOC or apply for a second mortgage? Speak with our professional mortgage brokers so they can help you determine which one would be a better way of using your home equity for you! Contact us today!

Second Mortgage or a HELOC? Which Is Better?

Choosing between a HELOC and a second mortgage can be confusing because both are loans that are attached to your home. Technically speaking, a HELOC and a second mortgage are both second mortgages, because you can only apply for them on top of your primary mortgage…so which is better and how are they different?

HELOC vs Second Mortgage

A HELOC and a second mortgage differs in how they are given by the bank and how they can be repaid. As mentioned earlier, both types of home loans are secured by your home, so it is very important to know how they work and to assess your capacity to pay them to ensure that you don’t end up losing your home.

How Does a HELOC Work?

A HELOC, or home equity line of credit, is a revolving line of credit that can be reused until the set limit is reached for the amount or the time period. Payment for the loan is on top of the primary mortgage and you only have to pay the amount that you use up or took out of the maximum allowable amount.

Because this is a revolving loan, you can re-borrow your paid-for credit until the terms of the HELOC state you can’t anymore. This means that if your HELOC is good for 5 years, you can keep re-borrowing any amount you’ve already paid towards it without the hassle of reapplying for a new loan.

How Does a Second Mortgage Work?

Although a second mortgage is also attached to your home like a HELOC is, the loan is given as a one-time lump sum that you’ll have to pay according to set terms. You won’t be allowed to apply for a new second mortgage until you’ve fully paid your second mortgage.

Because a second mortgage is given as a lump sum, most people who apply for it use it for debt consolidation and/or house deposits. You really have to think a lot and assess your full financial situation before applying for a second mortgage because inability to pay based on agreed terms can make you lose your home.

Is it Smart to Use These Loans as Emergency Funds?

The real answer to this is no. Why? Because with both loans, you’ll end up paying interest and putting your home at risk. Using them as backup cash for something that didn’t happen yet isn’t a good strategy. However, if you’re in a bind now and it can be a few months or more before you can recover, then applying for a HELOC or a second mortgage is a viable option.

Which Is Better?

The best answer for this will depend on your specific circumstances. Just remember that their nature and payment schemes are way different so having a clear idea of your future financial situation is paramount to intelligently choose between a HELOC and second mortgage.

Choosing between financing options can be confusing. This is why you need assistance from mortgage professionals who have a long track record of helping people get approved for loans while making sure that payment terms are doable for you. Contact us today to apply for a second mortgage or apply for a home equity line of credit.