People borrow money for a wide range of reasons, including purchasing property, making a business investment, and consolidating loans.
One way people often choose to borrow money is by using their home equity to borrow from a bank or financial institution. Your home equity is calculated by taking that current appraised market value of your home minus the balance left on your mortgage.
The biggest advantage to borrowing on your home equity is that the interest rates are usually lower because you are using your home for collateral.
In addition, your home equity gets higher every time you make a mortgage payment or the market value of your homes improves.
Options for Borrowing on a Home Equity
Refinancing: One of the most common method used to borrow on your home equity is to refinance your current mortgage. This provides you with access to the amount of equity that you have been able to build up over the years.
Changes may have to be made to your current mortgage and your interest rates may be different on the refinanced portion of your mortgage. The amount you can borrow through this method depends on the amount of your home equity.
Typically, lenders allow you to borrow up to 80 percent of your current home equity.
Borrow Back Your Prepaid Amount: If you opted to include the prepayment option in your original mortgage in order to pay off your loan faster, you may be able to borrow back some or all of that money back.
Keep in mind that you can only borrow the amount of money that you prepaid on your mortgage. If you choose this option, the amount you borrow will be added back into the total due on your mortgage.
There may be different interest rates imposed on the amount of money you choose to borrow back.
HELOC (Home Equity Line of Credit): The HELOC loan, or Home Equity Line of Credit, is basically like all other types of line of credit loans, except you can only borrow 65 percent of your current home equity amount.
This is a flexible account that allows you to borrow the money when you need it and then pay it back according to the set payment terms in your loan.
You can only borrow up to the amount of your specific line of credit. Banks and financial institutions must adhere to the regulations of the Office of the Superintendent of Financial Institutions, or OSFI, when offering these loans.
Second Mortgage: You may also be able to obtain an additional mortgage against your home equity. Your eligibility may depend on your credit score and home equity value.
This would be considered a secondary mortgage, meaning that if your home went into foreclosure this loan would be paid off only after the first or primary loan. For this reason, secondary mortgages usually have a higher interest rate.
Compare Your Options
It is important to compare your options before you decide which home equity loan is right for you. Below is a basic comparison of the four major features of these loans to help you determine which one is right for you.
Interest Rates: A second mortgage will have the most significant increase in your interest rates. The other three options will have interest rates that will most likely remain similar to your current rates or only slightly higher.
Credit Limits: The credit limits vary greatly between the different options. Second mortgages allow you to borrow up to 80 percent on your current home equity, while HELOC loans have a 65 percent allowance.
Prepaid loans allow you to borrow up to 100 percent, but only on the amount you have prepaid on your mortgage, and refinancing limits often depend on your credit ratings.
How Is Money Accessed: The HELOC loan is the only option that allows you to borrow only the amount you need, as you need it.
This may help you save money in the end, but can also be more difficult to budget for. The other three options require you to borrow one lump sum at one time.
Costs Involved: All four options require the borrower to pay additional administrative fees, such as appraisal costs and legal fees.
The option the is right for you depends greatly on your specific situation. Interest rates , amount of payments, and flexibility often play important roles in this decision.
However, you may need to talk to a mortgage broker to help you determine which type of mortgage will work best for your situation. The broker can also work on your behalf to get you better payment arrangements and interest rates.