Ways to Access Your Home Equity in 2021

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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.

Does a Second Mortgage Differ from A Home Equity Line of Credit?

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A home equity line of credit is not the same as a second mortgage although the other term for a second mortgage sounds like it. A second mortgage also goes by home equity loan and some people are confused about the difference between the two. Both are types of mortgage loans that go on top of a primary mortgage but they differ in how the funds are made accessible to the homeowner. With a home equity loan, the money is handed out as a lump sum while with a HELOC, the money is made available as a revolving credit line, very much like a credit card.

How Does a Home Equity Line of Credit Work?

A HELOC works as a revolving line of credit. This line of credit is opened by the lender using the home equity as a guarantee against the credit line. This means that a borrower can keep borrowing and paying the line of credit for as long as and as much as the term allows during the draw period which typically lasts for about 10 years.

The payments and interest for a HELOC vary per month based on the amount borrowed. The repayment period typically lasts for about 20 years. If no amount was used up during the loan period, then there is nothing to pay back because the homeowner technically doesn’t owe anything from a HELOC until they draw from the line of credit. Note that if the home’s value drops significantly, the line of credit may be frozen by the lender and missing payments can mean risking losing one’s home.

How Does a Second Mortgage Work?

A second mortgage uses the home’s equity as collateral. The homeowner is allowed to borrow money based on the equity that they have. This money is given out as a lump sum at the beginning of the loan. The loan then follows a fixed payment amount and interest until the entire loan is paid off. Once paid off, the homeowner can borrow again.

Missing payments on a second mortgage can place your home at risk of foreclosure. It is best to make sure that you can afford to pay both the primary mortgage and second mortgage before getting one.

Is A Second Mortgage Better Than A HELOC?

People use a HELOC or a second mortgage to meet their specific needs because each comes with their set of pros and cons. Both can be used for big and small expenses such as paying for home renovation, financing debt consolidation, funding higher education, and more. Both can result in losing one’s home for failure to make payments.

Can A Second Mortgage or a HELOC Be Used as An Emergency Fund?

Technically, the answer is yes but ideally, no. It can take a few days to a few weeks for the loans to be approved and so they can’t be relied upon in an emergency unless the loans are already existing. It is best to have some savings for an emergency for optimum financial stability.

Get A Second Mortgage or a HELOC Now

If you’re thinking of applying for a HELOC or getting a second mortgage, it is best to consult with trusted mortgage professionals first to find out which one may be better based on your specific circumstances. Contact us at Mortgage Central Canada so that our team can address your concerns. We are available to serve you in these trying times.