A home equity loan is a product offered by banks and other financing companies, which allows homeowners to borrow money based on the equity they’ve acquired on their home. For instance, if your home is worth $1,000,000 and you have a mortgage balance of $800,000 then the bank would consider your equity (which is the portion of your home you own) as $200,000.
Also known as refinancing your mortgage or taking a second mortgage, a home equity loan is a form of debt consolidation Toronto, which involves ‘buying off’ smaller loans. One main advantage of this is that you enjoy the convenience of making a single monthly payment.
Difference between a home equity loan and home equity line of credit (HELOC)
Many people consider home equity loans and HELOC to be similar but they are indeed different. With the home equity loan, you get a lump sum, which you can use to offset smaller loans. HELOC, on the other hand, is a revolving credit. This simply means that you get varying interest rate whenever you want to borrow and can take small amounts.
What interest rate will you pay for a home equity loan?
Most financial institutions will give you the same interest rate for the home equity loan as your first mortgage. This is especially the case if the factors that were put into consideration to qualify you for the mortgage have remained constant. However, there are lenders who charge higher interest rates for this second mortgage.
One thing to look at if you have a second mortgage with a higher interest rate is the due date. If the first and second mortgages have the same due date, it’s easy to combine them and enjoy the best interest rate.
Advantages of a home equity loan
- It could be a good option if you struggle with many smaller loans since you can negotiate and get flexible repayment terms.
- You can negotiate to pay lower premiums by extending the amortization period, which is the time that’s required to pay back the loan.
- You’re likely to enjoy lower interest rates than what’s paid by most banks
- You get immediate access to cash and can quickly pay off high-interest credit card debt.
- You can use the money to not only pay off your bills but any other thing you wish e.g. renovate your home.
- By paying off the bad debt, you get to improve your credit score.
- Your home’s equity acts as a collateral in case you are unable to make payment.
- Current mortgage rates are at an all-time low (2% and 5%), which means there’s a high chance they’ll go further down. Interest rates for the home equity loan can go up any time.
- If your mortgage is near in value to the value of the home, you may not qualify for a home equity loan.
- Most finance companies and sub-prime lenders offer really high-interest rates on second mortgages. You could even end up paying between 14% and 30% in interest for this loan
- You can pay additional fees to set up this second mortgage
- Most banks have a minimum loan amount that they can give for the second mortgage ($10,000)
Debt consolidation toronto with a home equity loan can help you reduce applicable interest charges. However, ensure that once you access this loan, you do not use it to finance things that put you in further debt.