A home equity loan and home equity line of credit (HELOC) are two great ways to borrow against the equity built up in your home—especially with housing prices rising steadily in the GTA and Barrie and interest rates near record lows. If home improvements are on your to-do list, it’s an excellent time to consider a home equity loan or HELOC . Just make sure you understand the difference, and make sure you find the best home equity rates.
What is a Home Equity Loan?
If you’ve been paying down a mortgage, you’ve been building up equity; that’s the difference between what your property is worth and what you owe on it. If the value of your home in the GTA or Barrie has increased, you probably have more equity than you thought you did.
If you need money for home improvements, to pay off unexpected debt, or to go on a vacation and you want to take advantage of your home’s value without selling it, you could consider getting either a home equity loan or HELOC. The two might sound the same but they operate very differently. That’s why it’s important to know the differences.
Types of Home Equity Loans
There are two types of home equity loans: lines of credit and term loans (closed-end). They are sometimes referred to as a second mortgage because they use your property as collateral.
The home equity loan and HELOC are based on the current value of your property minus any outstanding loans, including the new one you’re getting. Lenders will add the loans together—in this case, the first mortgage and second mortgage—to get the loan-to-value (LTV) ratio.
The maximum amount you can borrow will differ depending on whether you choose to take out a home equity loan or HELOC. The maximum you can borrow with a home equity loan is up to 85%.
Because of new tighter lending rules, the maximum you can borrow with a HELOC is 65%. Technically, you can still borrow up to 85% of the home’s appraised value, but any amount over 65% must be amortized (paid off on a fixed repayment schedule like a regular mortgage).1
Home Equity Loan
A home equity loan is often referred to as a second mortgage because it’s secured by your property and is second in line to get paid off in case there is a default. Once you’re approved for a home equity loan, the lender will send you a one-time lump-sum payment for the total loan amount. Once you receive the money, you cannot borrow any more from the home equity loan. It is also paid off over a set amount of time, with a fixed interest rate and set monthly payments.
A HELOC works like a revolving line of credit. You can borrow up to a certain amount for the life of the loan, which is set up by the lender. During this period, you can withdraw money as needed. As you pay off the principal amount, the credit on the HELOC revolves and you can use it again. Where a home equity loan has a fixed interest rate, a HELOC has a variable interest rate.
Home Equity Loan vs. HELOC
The biggest appeal of a home equity loan and HELOC is the interest rate, which is almost always lower than rates attached to a credit card or unsecured bank loan. That’s because the property serves as collateral for the HELOC or home equity loan.
That said, each loan treats interest rates differently. A home equity loan charges interest on the total loan amount. But because it is a fixed interest rate, you know how much your monthly payments will be. Because the interest rate on a HELOC is variable , it will fluctuate. As a result, payment amounts will vary. At the same time, with a HELOC, you only pay interest on the amount you’ve taken out.
Interest rates aside, there are other differences you need to consider when deciding on which type of loan is right for you. A home equity loan is paid back like a regular mortgage is. There is an amortization period and the home equity loan needs to be paid off in this timeframe. On the other hand, a HELOC, because it is a revolving line of credit, is continually being paid down and drawn upon.
With a HELOC, the credit limit can increase as the equity in the home grows. With a home equity loan, you are given a lump sum and cannot access additional funds.
For these reasons, many see a HELOC as being much more flexible than a home equity loan. But there is no one-size-fits-all approach to loans. And the decision could come down to what you want to actually use the loan for.
Which One Is Right for You?
It really depends on what you want to use the money for.
Many Canadians opt for a home equity loan if they need money to pay for a one-time event and like the security of a fixed-rate loan. For example, if you need to pay for a wedding this month and re-shingle the roof the next month, you may want to take out a home equity loan. You know how much you need and don’t plan on borrowing again.
If you need access to money over a longer period of time, then a HELOC might be the best option . It provides the flexibility to borrow the amount you need when you need it. If you borrow small amounts at a time and can pay the principal back quickly, the variable interest rates may not negatively impact you. In this case, a HELOC can cost less than a home equity loan.
Canadalend.com, Helping First-Time Home Buyers in the GTA
Because housing prices in southern Ontario are strong and interest rates are at record lows, it’s not terribly difficult to find a lender willing to give out HELOCs or home equity loans in Barrie and the GTA . That said, the rates and conditions on the loans could vary significantly, and choosing the wrong loan could cost you thousands in unnecessary interest costs.
That’s why it’s important to talk to the independent, licensed agents at Canadalend.com. First, we’ll evaluate your financial situation and help you decide which kind of loan is best suited to your financial and lifestyle needs. Because we’re independent, we have access to hundreds of different lenders and can help you find the lender that’s right for you.
To find out what kind of loan is best for you, contact Canadalend.com today . Or apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.
1.“Borrowing on Home Equity,” Financial Consumer Agency of Canada web site; http://www.fcac-acfc.gc.ca/eng/resources/publications/mortgages/Pages/Borrowin-Emprunte-1.aspx, last accessed July 14, 2016.