A home equity loan is a powerful and popular source of financing that homeowners can use for a variety of major expenses, including home improvements, large purchases, or even debt consolidation. So how does a home equity loan work?
These loans are lump sum loans, based on the equity in your home and secured using your house as collateral. For most people, their homes are the largest investment they will ever make. Through a home equity loan, homeowners can leverage this tremendous source of value to secure financing.
Most people use this financing to bridge the gap during hard times or carry out a large project, like home renovations. But homeowners are free to use their funds as they see fit, so if you have been eyeing a major purchase or have nagging credit card debt that you want to wipe out, you can make it happen by using your home equity.
What is Equity?
Home equity is equal to the difference between the value of a home and the unpaid balance of that property’s current mortgage. The more equity you have in your property, the more money you can borrow.
For example, if your home is worth $550,000 and you have $200,000 in outstanding mortgage debt, your home equity would be $350,000.
How Much Can I Borrow by Using my Home Equity?
When you draw from your home equity, lenders will cap the amount of financing they are willing to advance, based on a variety of factors. In general, homeowners can receive something in the vicinity of 80% to 90% of their home equity.
When it comes to the specific terms and conditions a lender is willing to offer based on your accumulated home equity, your credit score and payment history will be taken into account when they decide on the final amount and your interest rate.
How Can I Increase my Home Equity?
You can increase your home equity in two ways:
- By paying down your outstanding mortgage balance
- By increasing the value of your property
Homeowners that have already made substantial progress on paying back their mortgages, or anyone that has seen their property values increase recently, are usually pleasantly surprised when they learn how much value they have at their disposal.
Although certain factors that affect home equity values, like the real estate market, can’t be directly influenced by homeowners, there are ways to accelerate the appreciation of your property.
With this idea in mind, many people opt to increase the value of their homes through repairs and renovations, by using their home equity for financing. In this way, short-term borrowing can lead to long-term benefits for your financial health.
Home Equity Loans for Security and Stability
Because they operate on fixed rates and terms, home equity loans provide homeowners with a clear structure and timetable for repayment, which makes managing the household budget that much easier. Thanks to this peace of mind, homeowners can go about accomplishing their goals without needing to worry about market fluctuations or interest rate variability.
A home equity loan is a great way to access financing, however, this approach is not without risk. If the value of your home decreases after you have taken out a home equity loan, you may end up owing more than your home is worth!
Remember: A home equity loan uses your home as collateral. If you can’t pay it back, it is possible you may lose your home. Borrowers should always be comfortable with the terms they agree to, and comfortable with the rates they agree to pay.
Are There Different Types of Home Equity Loans?
Homeowners can use their equity to secure financing in two ways, through a fixed-rate home equity loan or with a home equity line of credit.
A home equity line of credit is slightly different than a fixed-rate loan. A revolving line of credit is quite similar to a credit card, meaning that you can borrow, pay it back, and then borrow more. Borrowers are usually only allowed to borrow money over a set time frame, after which the outstanding credit must be repaid. Although it varies from lender to lender, home equity lines of credit usually have variable interest rates.
Equity loans on homes deliver financing in one lump sum, and usually you are required to pay it back on a regular basis over a set timeline. Their interest rates are set in advance, and will not change.
Credit Arch – Committed to Security, Simplicity and Transparency
As one of Canada’s most trusted sources of home equity funding, Credit Arch can connect you with the perfect lender for your situation.
Your home could be a huge reserve of untapped value, with Credit Arch’s help, you could turn that value into a large source of financing to pursue your goals!