|Lower your payments||Access your equity||Renovate, consolidate debt, or invest|
A home equity loan is also called a second mortgage, and is money that you borrow from a lender which is secured against the equity in your home. Your equity is the difference between what you owe on your house (the remaining mortgage amount) and what your home would be worth if you sold it today (market value). The more equity you have, the more you can borrow.
The reason that home equity loans are known as second mortgages is that they're usually taken out while you still have a first mortgage owing (but not always – you can take out a home equity loan on a home after the home has already been paid off.
Interest rates are higher for a second mortgage than for a first mortgage. The second lender takes on a bigger risk than the first lender because if you were to default on your mortgage payments, the first mortgage lender gets paid out before the second. If there isn't enough money to cover both mortgages after a foreclosure, then the second mortgage holder may not be able to get their money back.
With a home equity loan, you can borrow up to 85% of your home's value, less the mortgage amount you still owe.
Let's take a look at an example:
|Appraised value of your home||$500,000|
|Maximum loan amount allowed (85%)||$425,000|
|Balance remaining on your mortgage||$300,000|
|Second mortgage limit||$125,000|
A HELOC is a revolving loan, while a second mortgage is an instalment loan. A revolving loan can be used almost like a credit card (in fact, some HELOCs come with a card that lets you spend money from the line), while an instalment loan is more like a mortgage.
You have a limit that you can borrow up to at any time. When you first apply for a revolving product, your utilization is 0%. You can apply for a revolving product well before you intend to use or need it, and as long as the balance is $0 you don't pay anything.
Whenever you need money, you take money from the line. Depending on your lender, there are a couple ways that you can access the money. Some come with cards that you can use like credit cards at retailers, but others only allow you to transfer funds online from the banking web portal. Either way, you'll start accruing interest only from the day you use it.
HELOCs are interest-only products. That means you're not required to repay the principal monthly, only the interest. Your monthly payments will be much lower than a loan that requires interest and principal payments, but there is no set schedule for repayment. If you never pay down the balance, you'll pay interest charges forever.
You can pay the full balance of you HELOC at any time with no penalty. The sooner you pay it off, the less you'll pay in interest over the life of the loan.
When you take out a home equity loan, you borrow a certain amount and promise to repay it over a set period of time. As soon as the financing is released, you're using 100% of the loan.
You get the full amount of the loan in a lump sum. It's up to you to spend it wisely. Many lenders will let you take out a home equity loan for literally any reason – just make sure it's a good one.
You have a set monthly payment with a home equity loan that you have to pay every month. Depending on your lender, you may have the ability to pay an additional amount on top of your monthly payment to repay it faster. However, paying it off in full may result in a penalty.
A home appraisal will tell the lender how much your home is worth. Since the amount you can borrow is directly tied to your equity, this is a crucial step in getting a HELOC.
Usual cost: $150 - $250
A title search confirms that you are the rightful owner of a property. With identity theft on the rise in Canada, it's important that your lender verifies you own the property you're trying to add a loan to.
Usual cost: $250 -$500