Homeownership has many benefits, including the ability to use your property’s equity as a lending resource. Whether you need funding for a renovation or to consolidate debts, a mortgage holder can access home loans and home equity lines of credit (HELOC) through their property. There’s also the option to remortgage your home, which by breaking your existing mortgage and starting a new one, can provide leftover cash through your home’s equity to pay for large expenses.
If you’re considering employing your home’s equity, here’s what you need to know about HELOCS, home equity loans, and remortgaging.
What is a Home Equity Line of Credit (HELOC)?
If you’re looking to have some flexibility with having a larger chunk of change on standby, a HELOC may be a great option for you.
A HELOC is a facility on your mortgage that lets you take out cash from your home’s equity as you need it. HELOCs are a type of revolving credit, meaning you can borrow money, pay it back, and borrow the funds again. You can use as much or as little of the HELOC as you want.
In a recent survey conducted by BNN Bloomberg and RATESDOTCA, 27% of those surveyed said they had a HELOC, and 78% said they used it. Most participants said they borrowed less than $50,000 on their HELOC.
There are many reasons why someone might make use of their HELOC. Often they are used for big expenses such as paying for a vacation or a renovation, consolidating other loans or for investment purposes. Other times they are used by parents to pull money out to help fund a child’s wedding or down payment.
A HELOC allows you to access up to 65% of your home’s market value, providing a larger loan amount you wouldn’t likely secure through a credit card or other line of credit. However, your outstanding mortgage loan balance, combined with your HELO, cannot equal more than 80% of your home’s value.
A HELOC also tends to provide a lower variable interest rate compared to credit cards and other personal loans, but is higher than variable mortgage rates. A HELOC allows borrowers to make interest-only payments, which 8% of HELOC holders tend to do.
It’s important to note that as interest rates rise, the cost of borrowing also increases, which can affect HELOCs. As home equity lines of credit are based on variable-rate interest, borrowers might be on the hook for higher payments as rates fluctuate in today’s market.
What is a Home Equity Loan?
Although they sound similar to a HELOC, home equity loans are slightly different.
A home equity loan is a one-time lump sum payment. An equity loan starts at $10,000 and co go up to 80% of your home’s value. A home equity loan borrower will pay interest on the entire amount.
Unlike a HELOC, an equity loan isn’t a revolving form of credit, meaning you’ll be required to pay the loan over a fixed pre-determined period, including the principal and interest. However, home equity loan interest rates still tend to be lower compared to credit cards, unsecured personal loans, or lines of credit.
The advantage of a home equity loan is payments are set at a fixed rate. If you’re someone who prefers a more predictable monthly payment, a home equity loan allows you to use your home’s equity but at a more consistent pace.
How does Remortgaging Work?
If neither a HELOC or a home equity line sounds appealing, a homeowner can still extract value from their property’s equity by remortgaging.
Remortgaging, otherwise known as refinancing, involves replacing your existing mortgage with a new one with different terms. A homeowner may decide to take advantage of lower interest rates. Breaking your mortgage before your term ends can open up steep prepayment penalties, which can vary based on several factors, such as type of the interest rate you have. It’s important to understand the size of your pre-payment penalty before your remortgage so you can justify the savings if you switch to a new mortgage.
Remortgaging your home allows you to access equity in your home when you renegotiate your mortgage terms. A homeowner can tap into 80% of their home’s appraised value as a lump sum, excluding the balance of their current mortgage. Like a HELOC or home equity loan, this money can be used for large expenses such as to invest, fund a home project, or pay off debt.
Whenever you plan to take advantage of your home’s equity, or make any other changes to your mortgage, there’s a number of factors to consider.
If you intend to move in the near future, inquire if your mortgage is portable, which will allow you to take your existing mortgage along with its current rate and terms from your old property to your new one.
You may also want to ask if there are any specific areas of your agreement you can negotiate with your lender, including your mortgage rate. In the initial and renewal stages of a mortgage, it doesn’t hurt to shop around between different companies to find the best rate. In some cases, a mortgage broker will be able to provide you with additional savings to your mortgage – some companies buy down interest rates, which allows them to give up part of their commission from the lender in order to lower their client’s rate. Your mortgage professional will be able to help answer any of these questions.
If you have any questions about which option wold be best for you, get in touch with us today! We would love to chat about how we can help you achieve your financial and real estate goals. We work with a variety of different mortgage specialists who can assist you to finding the right option that is best suited for your needs.