Should You Choose a HELOC, a Second Mortgage, or a Refinance to Access Your Home Equity?

There are many ways by which you can access the equity that you have in your home, but choosing which one to go for will not be an easy call. You have to consider the purpose that you’ll be using your home equity for, your financial goals, and how you’ll be able to pay back the funds after you’ve used them.

Your equity is one of your biggest assets; hence choosing what to do with it and how to access it is not something that can be taken lightly. Luckily for you, we’ve summarized some information that can help you decide whether you’re thinking of accessing your home equity via a second mortgage, a HELOC, or a refinance.

Get A Second Mortgage

If your credit score is less than 650 and your home equity is just around 20%, your best option to access your home equity is through a second mortgage. Second mortgages are relatively easy to qualify for, with some private lenders only requiring a 10% home equity and a credit score between 550 and 700; however, you have to be ready for the fact that you’ll pay mortgage fees, legal fees, self-insured fees, and appraisal fees. This makes getting a second mortgage less attractive than the other options to access your home equity below but remember that a second mortgage like this can still save you a lot of money if you’ll use it to consolidate high-interest credit card debt. Don’t forget that payments for a second mortgage go on top of your payment for your primary mortgage.

Refinance Your Mortgage

A refinance is a smart way to use your home equity if you know how much funds you need and you have a credit score of at least 650. A refinance will allow you to access as much as 80% the value of your home provided that you meet the lender’s parameters which you can get via a lump sum and pay with a fixed or variable interest rate. Note that with a refinance, you will be charged interest on the entire loan, unlike a HELOC below.

Apply for a HELOC

HELOCs have many advantages and disadvantages but the most attractive feature is definitely the flexibility to only withdraw or use a portion of it when you need it. A HELOC won’t force you to use the entire loan amount and will only charge you interest on the amount you use. It is a form of revolving credit so you can pay and reuse until a predetermined time or value is reached. Lenders typically require about 20% home equity and a credit score of about 650 to qualify for a HELOC, however, private lenders may be able to provide you with options depending on a variety of factors.

The above are the 3 most common ways to access the equity of your home. Should you need further details, feel free to contact us at Mortgage Central Canada.

Must Read About Home Equity Lines of Credit (HELOC)

You may be interested in getting a home equity line of credit or perhaps have at least heard of it, bringing you here to read this blog. A HELOC comes with a lot of benefits such as relatively low interest rare, possible tax deduction, and access to your home equity, no wonder it is so tempting to get a HELOC!

Is a HELOC Right for You?

If you’re looking for ways to tap your home equity, then getting a HELOC is one of the options that could be right for you – but at a cost. A HELOC is still a type of loan and loans always come with a set of risks along with potential benefits. It is up to you to research these factors and determine if the benefits outweighs the risks. Remember, failure to pay your HELOC can mean the loss of your home as this type of home loan uses your home as collateral.

What is a HELOC in Simple Terms?

A HELOC is a line of credit that is tied to your home’s equity and functions as a revolving form of credit. It is similar to having a credit card but with potential for a truly high credit limit because the homeowner’s home equity is a major factor in determining how much can one borrow through a HELOC. Because of this, people who get a HELOC often do so to finance major expenses such as paying for higher education, recurrent medical bills, or home improvements.

How Does a HELOC Work?

With a HELOC, the borrower is approved for a certain credit limit that the borrower can borrow all at once, or little by little if needed be. The credit limit is based on several factors including the value of the home equity that the homeowner had built, the ability to pay, credit score, financial history, outstanding debts, and other financial obligations.

HELOCs typically come with a fixed period of borrowing followed by a period of repayment as well as possible renewal. Note that some plans will require a full payment before allowing a renewal while some will allow to renew as soon as the borrowing period is over. This varies from one lender to another.

Shopping for the Right HELOC Plan

Getting a HELOC comes with obligations and certain limitations. You will want to make sure that you’ve considered various lenders/providers to see which plans will fit your needs and ability to pay. Different plans have different features as well as interest rates. A low interest rate may apply for the first few months, so you better watch out for possible financial traps that you might overlook. You should also consider accompanying fees, needed paperwork, and upfront charges before choosing a provider. It won’t hurt to consult with mortgage professionals to explore other ways of tapping your home equity, such as getting a second mortgage instead of a HELOC.

Getting a HELOC is an important decision that you shouldn’t make blindly. If you have questions about getting a HELOC or how to leverage your home equity, do not hesitate to contact us at Mortgage Central. We’d be happy to help!