Are you looking to borrow equity from your home? You have two main options: home equity loans and HELOCs. In this article, we’ll look at how they both work.
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Are you looking to borrow equity from your home? You have two main options: home equity loans and HELOCs. In this article, we’ll look at how they both work.
A home equity loan is a loan that you take out that’s secured against the equity in your home. You need to have at least 20 percent equity in your home to take one out.
A home equity loan is an instalment loan. It works in a similar way as a student loan or car loan. You’re required to make scheduled payments over the term of the loan until it’s paid off in full. These payments include both principal and interest, which can be advantageous, as it forces you to pay off the loan based on a set schedule.
With a home equity loan you receive a lump sum amount that you can do with as you see fit. This makes it ideal for home renovation projects that you know you’re going to do. For example, if you’re going to redo the kitchen or bathroom right away, then a home equity loan can make sense.
Home equity loans tend to have similar interest rates as mortgages, making them an affordable option for homeowners. Home equity loans are almost always a lot more affordable than taking out a personal loan or borrowing money from an unsecured line of credit.
A HELOC, short for home equity line of credit, is a revolving credit account, similar to a credit card or unsecured line of credit. As its name suggests, it lets you borrow money against the equity of your home. Similar to a home equity loan, you need at least 20 percent equity in your home to take one out.
A HELOC works exactly the same as your credit card or unsecured line of credit. You can withdraw money as you need it. However, you only pay interest on it when the money is withdrawn. If no money is withdrawn, you won’t pay any interest on it.
HELOCs tend to come with higher rates than home equity loans. The typical rate on a HELOC is Prime Rate, plus 0.50%. (Prime Rate is the rate lenders offer to their most creditworthy customers.)
If you know that you’re going to do home renovations, but you’re not sure when, a HELOC can make sense. That’s because you won’t pay any interest unless there is a balance on your HELOC. If you don’t use it for two years, you won’t pay any interest on it until then, making it a less costly option for those who might not need the money right way.
If you’re concerned about rising rates and payments, a home equity loan may be the best option. It offers you the option of locking in your rate. You don’t have to worry about rising rates for several years – until your home equity loan comes up for renewal.
If cash flow is your biggest concern, you might be better off going with a HELOC. That’s because HELOCs let you pay interest only payments. This is different from home equity loans, which typically require you to pay amortizing (principal and interest) payments.
HELOCs do usually come with a variable rate, so you do have to keep an eye on rising rates. Although you won’t feel rising rates as much from a cash flow standpoint as you would with a mortgage, as you’re making interest only payment. Therefore, your payments won’t increase by as much.
The next time you want to borrow equity from your home, you should have a much better idea of the best way to go about doing it.
HELOC links for BC, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, PEI, Newfoundland and Yukon are available to learn more about your home equity loan possibilities to be able to participate in the Government Grants & Rebate programs available in your province or territory.
