July 15th, 2019 | Updated on June 3rd, 2021
The home equity loan refers to the type of loan where you have to mortgage the equity of your home to qualify for an amount. For example, if your house is $200,000 worth in the market, and you have to pay $50,000 more for its complete ownership, then your remaining equity in the home is $150,000.
In Canada, home equity loans are quite popular because borrowers get a large sum of money for a reduced interest charge. This facility is not available with unsecured loans. Also, this loan is generally easy to pay off. People who have bad or no credit score can also be eligible for it.
Types Of Home Equity Loans
A Home Equity Line of Credit (HELOC) and second mortgage are the two popular choices in this in Canada. The second mortgage loan refers to an instance where you already have the first mortgage on your home, and home equity loan is the second one. In that case, you will have to clear your primary mortgage first if your property gets foreclosed or sold out and then the second mortgage.
HELOC is also almost like a second mortgage. The main difference, however, is that you don’t get all the money in one go. You have access to the funds as and when required. And if you pay back some part of the original mortgage, you can get your credit line increased.
It so happens because some HELOCs are re-advanceable mortgage type. Another thing is interest rate generally applies to the amount of money you use. However, getting this kind of loan is not as easy as you may need to have good credit ratings and regular income.
Benefits Of Home Equity Loans
- Money can come in different forms, such as lump sum, regular payouts, or whenever you need to access it based on the type of plan you subscribe
- You can use the loan amount for different purposes
- You get a credit card and cheques to use funds under the home equity line of credit
- You generally have to pay lower interest rates compared to unsecured loans and credit cards
- You can be eligible for huge funds if your equity in the home is substantial
However, when you opt for it, make sure you are thorough with your research. There are some downsides also to this option. And by being aware of them, you can plan your step carefully. Some of the main disadvantages can be:
- You may have to pay a certain amount every month
- You may fail to qualify for HELOCs and such other options due to a lack in credit score or income
- You may have to pay higher interest rates up to 10% on some loans due to insufficient credit ratings and income
Anyway, before taking a decision, it is always better to weigh your options thoroughly. Some people apply for home equity loans for different reasons, like:
- To pay their medical bills
- To cover home renovation or automobile repairing costs
- To fund a college education
- To enjoy a vacation
The home equity loan can redeem you from your financial stress if adequately utilised. For help, you can approach a trusted entity like Mortgage Central Nationwide Home Equity Loans Toronto or someone else.