A Quick Primer on Home Equity
A Quick Primer on Home Equity
Once you own a home that you bought with a mortgage, you will have home equity. But what is home equity, what can you do with it, and what do you need to be careful about?
What is home equity?
Home equity is the difference between the market value of a home and any outstanding mortgage balances on the property. Home equity can be used to secure other loans secured against your home, such as a home equity line of credit (HELOC), or it can be tapped into to provide cash for big expenses like college tuition or a new car. Keep in mind that if you use your home equity for big purchases, you're putting your property at risk if you can't make your payments.
How does someone get home equity?
Home equity allows you to borrow against the value of your home. You can borrow against your home in several ways, including taking out a home equity loan or line of credit. The more equity you have, the more money you can borrow. And if you ever need to sell your home, you'll get back the money you borrowed plus any profits from the sale above what you still owe on your mortgage.
How do you increase your home's equity?
Since home equity is the appraised value of your home minus the amount you still owe on a mortgage, then your home's equity will slowly go up over time as you pay down your mortgage.
Renovating your home and making changes that increase its value will also add to the equity value because it will increase the home's appraised value.
Some important things to note about home equity.
Your credit limit is tied to the value of the equity in your home, but home equity lines of credit only allow you to borrow up to 80 percent of what your home is worth.
The interest rate for home equity lines of credit is a lower interest rate than one for a credit card because the home is used as collateral. Since credit cards are classified as unsecured loans, the higher interest is used to account for the risk, whereas a home equity line of credit (HELOC) is secured by your home.
Renovations to your home can be paid by your home equity. If the home improvement leads to increasing your home's appraised value you can effectively use your home equity to increase how much the home is worth and thus have more equity. Keep in mind that appraisal has a cost, so the amount you may gain is set back by the appraisal cost.
You can use home equity to get a new mortgage for a second home. The interest rate you can get for this new mortgage depends on how much of your home value you have paid back from your mortgage. Of course, good credit will help you secure low-interest rates but a good amount of home equity can lead to much lower rates than your first mortgage.
What is a home equity loan?
A home equity loan is not the same thing as a home equity line of credit.
Home equity loans and home equity lines of credit, also called HELOCs, are two different ways to borrow money against the value of your home. A home equity loan is a one-time lump sum that you borrow, while a HELOC is a line of credit that you can borrow against whenever you need it.
You can use a HELOC to pay for things like home repairs or college tuition, and the interest may be tax-deductible.
A home equity loan is when you borrow one large sum of money. The interest rate on home equity loans is generally higher than either a HELOC or credit card because your house isn't used as collateral. Plus you have to pay back the loan over a set period which makes it harder for borrowers to meet their monthly payments if they run into financial trouble.
The money from a HELOC can be used for any purpose, with a few exceptions.
Home equity loans can be used to pay off debts, make home improvements, start a business or consolidate credit card debt.
You'll get the best interest rate on your HELOC if you don't borrow all of the available funds. In other words, it's better to only borrow what you need over some time to avoid paying high interest.
Can you build home equity in a condominium?
You can build equity in condos, but it's usually more difficult because buildings are owned by homeowners' associations. And if the building needs maintenance, you have to pay the costs through your HOA fees.
Keep in mind that your condo may need repairs or renovations at some point which can be paid for through your home equity, although the assessment may be passed on to your neighbours as well.
This is something that most people don't think about but since you do own part of the condominium instead of renting it out, you are building home equity.
You can use that equity to fund the purchase of your next home which is why condominiums are a great idea if you can afford them but not a house right away.
Keep in mind that this can take a while and it will require some patience before you can start to use home equity derived from a condo.
What is home equity conversion mortgage (HECM) or Reverse Mortgage and how do they work?
In Canada, a reverse mortgage is available to people over 55 with equity in their homes. It lets people take out a loan o their home equity but there are key differences.
You can borrow up to 55% of the home's value and use it as you see fit. There are also no deadlines for paying off the reverse mortgage but interest does accrue over time.
You must pay back the loan when you sell your home, move out or pass away.
To get a reverse mortgage, you need to prove that you can afford monthly payments and aren't using this for luxuries like vacations.
These kinds of mortgages are usually taken out to help stabilize a bad financial situation. This can help homeowners pay off bills to stabilize their living situation without losing their homes.
View All Homes For Sale in Greater Vancouver >>>
About Search Home Listings
SearchHomeListings.ca has simplified the home buying and selling process by giving you superior tools with up-to-the-minute information including active homes for sale, sold homes, market reports, and a home valuation tool! We have a team of success managers on standby to support you with setting up your saved home search and agents ready to take you out on a tour. Tap into our industry experts from inspectors, to contractors to interior designers to provide you with the best prices and service possible. Everyone attached to our website has been rigorously vetted and is made up of caring, knowledgeable professionals that work tirelessly to help you to make your home buying experience as stress-free as possible. Contact us today to see how we can help!
Sites We Follow
Categories
Recent Posts
};