As a homeowner, your equity is the thing that makes mortgage payments a little easier to stomach. Essentially, the more mortgage you have paid off, the more equity you have in your home.
If you've paid off 20% of your entire mortgage, you may be able to borrow up to 80% of your home’s appraised value to pay for things like home renovations or post-secondary education. While this may sound ideal, it's important to proceed with caution when borrowing against your home.
Home equity, when it comes down to it, is the portion of your home you own, and is the difference between what your home is currently valued at and how much of your mortgage you have left to pay off.
Let’s say your home is worth $500,000 and you have $150,000 left off to pay on your mortgage. That means your home equity is $350,000.
When you make mortgage payments, you build equity in your home, and your home will typically increase in value due to appreciation. As your home's value increases, your equity grows, which is an essential way to build personal wealth for many homeowners.
If you're looking to tap into your home's equity, you can do so by using one of the following financial tools:
To access the tools above, you'll need to apply for a loan or line of credit with a lender. The lender will consider factors like the reason you’re hoping to tap into your equity, credit score, income, and the amount of equity in your home, before deciding whether to approve your application and terms.
When tapping into your home's equity, you'll need to keep up with your mortgage payments and/or HELOC payments. Look for alternative financing if there's any chance you could default on your payments. When you borrow against the roof over your head, failing to make payments can result in foreclosure.
That said, there are many reasons why you may want to access your home's equity through a refinance or a HELOC. If you're confident and have run the numbers, tapping into your home's equity can be a lower-interest option than using credit cards or personal loans.
One of the most popular reasons to access your home's equity is to finance home improvement projects. These renovations will only increase your home's value, so it's usually a win-win. Whether you renovate your kitchen, add a bathroom, or finally finish your basement, your home equity can provide the funds you need to complete your project. Plus, you may be eligible for home improvement tax credits.
You can use your home's equity to consolidate debt if you have high-interest debt, such as a car loan or credit card debt. By consolidating your debt, you can lower your interest rate and reduce and simplify your monthly payments. But this option turns unsecured debt, such as your credit card, into secured debt backed by your house. If you can't pay your loan, you could potentially lose your house. If you fall behind on your credit card payments, it's a little less risky, although you risk compounding interest and missed payments dragging your credit score.
Being a business owner is expensive. If you need capital to launch your business or grow it, your home equity can provide you with the funds to get your business off the ground. Plus, taking equity out of your home may help you save money on interest instead of taking out a business loan.
Life happens, and sometimes unexpected expenses come up that you could have never planned for. According to financial experts, most Canadians should aim to have at least 3 to 6 months' worth of living expenses saved up in case of an emergency. If you don't have an emergency fund, using your home equity can help you cover those expenses.
A HELOC or refinance could also help you pay for your or your child’s college, university, or continuing education. If the mortgage rates are lower than student loan rates, then it could be beneficial for you to fund you or your child's education with a home equity loan product. But make sure to calculate your monthly payments during the amortization period to make sure you can pay them off comfortably.
Weddings are more expensive than ever, with the cost in Canada now averaging more than $30,000. With such a hefty price tag, many couples may opt to apply for a refinance or HELOC to pay for their dream day. Some ways to cut costs are cutting the number of guests or asking family if they could contribute to the day. It's easy for spending to get out of hand when wedding planning, so be sure to stay on budget and not over-extend yourself.
One of the most common ways to buy a second home is by tapping into the equity of your primary residence. A home equity loan or HELOC can help you buy an investment property, condo, or a family cottage to enjoy or rent out. Again, you are borrowing against your primary residence, so proceed with caution.
If any of the reasons above make sense to you, you may be thinking about tapping into your home's equity. However, there are a few things to consider to ensure it's the right move for you.
With a HELOC, just because you have $150,000 in equity doesn't mean that you'll be able to borrow that much money. Lenders calculate your loan-to-value ratio (LTV) to determine how much you're eligible for. Typically, in Canada, you can borrow up to 80% of the appraised value of your home, but how much you can borrow will also depend on your credit score and income.
As unpleasant as it is to think about, your home's value is not set in stone. If the housing market were to crash and the value of your home decreased, you could end up owing more between your home equity loan and your mortgage than what your home is worth.
At the end of the day, only you really know if a refinance or HELOC is right for you. While it may seem like a great way to access the funds to complete that home reno, it does come with some risk (but hopefully reward too), which only you can decide if you can handle.
If you have questions about accessing your home's equity, a mortgage agent will be happy to answer any questions you may have.