Home Equity Loans

Home Equity Loans  
Home Equity Loans Canada - Smarter Loans

Be in the Know About Home Equity Loans in Canada

Home equity loans are another way for homeowners to gain access to money based on the equity they have built in their property. Although they are similar to a home equity line of credit, also known HELOC, there are differences between the two. For many homeowners, a home equity loan might be a better alternative to borrow cash instead of other options, such as personal loans.

For homeowners considering tapping into their home equity for any reason, information is key.

Therefore, these home equity topics will be covered is this article:

  1. About Home Equity Loans and HELOCs
  2. Definition of Terms Related to Home Equity Loans
  3. Insider Information
  4. Potential Risks of Home Equity Loans
  5. Where to Start in the Home Equity Loan Process

 

About Home Equity Loans and HELOC’s

Home equity loans and home equity lines of credit share some of the same characteristics. Both are borrowed from the equity in the home. Also, both are approved using the borrower’s home as collateral. However, they are not identical. Knowing the differences can provide homeowners the opportunity to make sound borrowing decisions.

The choice between the two depends on the homeowner, but other considerations that could make home equity loans more favorable are:

  • Home equity loans are more likely to come with lower interest rates which stay the same throughout the loan.
  • A lump sum of money could be more feasible for major expenses.
  • The potential for tax deduction on the interest paid (as advised by a tax professional).

 

Definition of Terms Related to Home Equity Loans

When researching for home equity loans, borrowers will come across certain terminology throughout the entire process. These are a few common terms that relate to home equity loans.

 

Equity – the value accessed to what a home can be sold for less the amount owed.

Fixed rate – interest that stays at the same rate for the life of the loan.

Adjustable rate – interest that changes up and down during the loan depending on the interest rate index.

Collateral – property that is used to secure a loan; the collateral in home equity loans is the home.

Closing costs – money paid to the lender when the loan is approved for expenses such as the title company fees, attorney, document preparation, and other costs.

Property value – the assessment of how much a home is worth.

 

Potential borrowers should do careful research so they are familiar with the loan process. It is equally important to ask questions before applying for a home equity loan.

 

Insider Information

There is no guaranteed formula to getting approved for home equity loans. So many factors determine the outcome of a loan application, such as locale, applicant income and credit score…too many to list. But it is possible to find information and suggestions to get a leg-up on how to improve the chances of qualifying for a loan such as:

  • Almost every lender will deny applications to homeowners with little equity, so it is best to wait until equity as built up to at least 30%, depending on the home’s value, to increase chances of approval.
  • Homeowners should consider a HELOC if they need a small amount of money rather than a home equity loan; in some cases, they will get approved with less equity.
  • Home equity loans are not the best choice for homeowners who plan to sell since they must be paid in full immediately upon sale of the home.
  • Borrowers considering a home equity loan should prepare ahead of time by getting finances in order. They should know their credit score and make sure all bills are current.
  • It is in the best interest of the homeowner to shop around to find lenders that will offer the best rates and terms for their loan.

 

Potential Risks of Home Equity Loans

First and foremost, homeowners should understand that home equity loans are mortgages, the same as the home loan they secured to buy their homes. Therefore, a home equity loan comes with the same risks as a first mortgage. Along with the great advantages of having access to credit, there are some serious risks involved as well.

Defaulting on a home equity loan means that the bank has the right to foreclose on the home. Since most people live in the homes they own, losing the home could be devastating, with repercussions which can last for many years.

If a home is foreclosed, the original lender is paid first, then the home equity lender, with the proceeds of the sale. If the sale of the house does not cover these debts, the homeowner must pay the difference. Ironically, if a home is foreclosed, the lender keeps money paid on the first mortgage as well as payments and fees from the home equity loan. They get possession of the property, which they can sell again and start the cycle with another buyer.

Home equity loans are monthly expenses that must be paid just like a mortgage. So, homeowners should be sure they are able to afford an extra mortgage payment before applying for a loan. They should not risk overextending their finances by including income that is temporary or unstable. Lastly, the borrower’s credit rating is at risk if the loan is defaulted, which has a huge negative impact on their credit rating.

 

Where to Start in the Home Equity Loan Process

The home equity loan process does not begin with the application. Advance preparation is necessary in order to be fully informed and prepared for the process. Potential applicants can get ready by taking certain steps following ahead of time.

 

Homeowners can:

  • Take an honest assessment of whether a home equity loan is the ideal solution to attain the financial goal they are trying to achieve.
  • Order and review a credit report ahead of the lender so there will be no surprises.
  • Any open negative items on the report should be paid.
  • The homeowner should begin disputes on their credit reports and keep this documentation to show to the lender.
  • As much information as possible should be gathered to verify all forms of income. Also, tax returns with W-2’s may be required.
  • Put together proof of assets like checking and savings accounts as well as investment and retirement accounts.

 

It is a good idea to have statements for current debts ready for review. The homeowner can include personal loans, auto loans, credit cards-any type secured or unsecured credit they owe. Lenders definitely need information about the property to process home equity loans. Homeowners can bring the latest appraisal, homeowner insurance, and other information pertaining to the home. The more documentation the homeowner can provide, the quicker and easier the process goes forward.

 

A home is most likely the largest investment a person will make in his or her lifetime. The home is also the place where life’s memories are made, as well as an asset that can be passed to future generations. The appeal of home equity loans is valid; they are a convenient means to unlock money from the value of a home. For homeowners making the decision to do so, knowledge is the power that will help the process have a positive and beneficial outcome.

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