Financial stress is a real challenge for many homeowners in Canada. There are home expenses, work, living expenses, possible maintenance medications, and other expensive needs. No wonder homeowners are getting more interested with the idea of tapping their home equity to give them financial relief when needed. But how can home equity be used this way? What makes this possible?
Using Home Equity for a Loan
Home equity is the value that a homeowner owns in a home. If a homeowner has been making payments towards a home, then over time, a larger portion of the home is truly owned by the homeowner. This value can be computed as the difference between existing debts and the home’s current market value.
If there has been a recent development in the area, then the home equity could be a lot larger than the sum paid over the years. Home equity loans allow homeowners to use their home equity for expenses that they cannot cover with their income or savings.
A home equity loan in Canada means any type of loan that makes use of the home’s equity as collateral. Compared to unsecured loans such as credit card loans, home equity loans have higher limits and lower interest rates plus offer better payment options.
To get a home equity loan in Canada, you can either approach a mortgage professional to connect you with private lenders or go to banks in your area. Note that applying to banks will often require more work as well as a great credit score whether you’ll be applying for a second mortgage or a HELOC.
Types of Home Equity Loans
Home equity loans are usually divided into reverse mortgage, second mortgage, and HELOC. We will only tackle HELOCs and second mortgages in this article.
A second mortgage is a home equity loan that is second in position to a primary mortgage. In the event that the homeowner fails to make payments and the home goes to foreclosure and sold, the primary mortgage will be the first mortgage to get paid followed by the second mortgage. This is why second mortgages have higher interest than primary mortgages. People who have a bruised credit or in a financial bind have an easier time getting a second mortgage than to qualify for a personal loan same as those with an excellent credit score; hence, homeowners opt for a second mortgage when they need extra funds. Funds are released as a lump sum for a second mortgage.
A HELOC is a home equity loan where a borrower is given a revolving credit with a certain limit. The funds can be accessed when needed and can be re-accessed after payment until the terms of the loan are up. Interest is only charged for the actual amount borrowed for any given month. Generally speaking, a HELOC is the most challenging to qualify for among all the types of home equity loans. There is a possibility that you can still get a HELOC even with a bruised credit if you borrow from private lenders with the help of mortgage professionals.
Do you want to know more about second mortgages and HELOCs? Are you still on the fence about applying for a home equity loan? Contact us and our mortgage professionals will be happy to answer your questions.