Home equity is the amount of money you have in your home calculated by appraised value less mortgage equals equity.
In other words, equity is the portion of your mortgage that you have finished paying off also influenced by rising home values.
How can equity help a household? It becomes a valuable asset.
If you have some equity in your home, there are some ways that you can turn that into cash to pay for things like your child’s college tuition or home improvement projects.
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Types of Home Equity Loans
To access your home equity benefits, you’ll need to apply for a loan.
This loan will convert your equity into dollars. In a way, you are selling part of your home to the lender.
There are two types of home equity loans:
Fixed-rate loans –
These are loans where a lump sum of money is given to the homeowner.
That money is repaid over 5 or 15 years. With a fixed-rate loan the interest rate stays the same over the entirety of the loan.
Home equity lines of credit –
A HELOC is a pre-approved amount of money that you can access at any time.
The interest rate for a HELOC is not fixed but it varies, similar to a credit card.
Borrowers are often given a time limit where they can access the money, for example 5 or 10 years.
Then the repayment period begins where you are no longer able to access the money.
How does it help the household?
Equity holds a number of benefits for Canadian households.
Having a significant amount of money wrapped up in your home can help you improve your financial security in many ways, such as:
- Home equity loans are easy to qualify for because lenders can secure the loan with a property, they are much more likely to approve your loan application. The risk of you defaulting on the loan and the lender losing their investment is reduced. It means you’ll be able to access cash more easily.
- You can make use of the unused monetary value of the asset and turn it into cash that your household can use to cover other expenses like college tuition, debt consolidation, or a home renovation project.
- When you are approved for a home equity loan, you’ll also get a fixed interest rate. With an interest rate that never changes, it will be easier to plan and manage your household expenses. Mortgages that have a variable rate mean that your monthly payments can fluctuate, which makes it more difficult to budget.
The suitable Ways to use a Home Equity Loan
What to spend your home equity loan money on is largely up to you, but these are the most common ways that homeowners use the cash:
- Home improvements – it makes sense to use the equity you’ve built up in your home to improve your space. Essentially, you are adding more value to the asset. While there are some renovations that have a higher payoff than others, any upgrade to your home is a wise way to use your equity.
- Emergency expenses – having a home equity loan to use in the case of emergencies gives you some added security. If you experience some hardship such as a job loss or medical issue, you’ll be able to access the money when you need it.
- Long-term investments – Your home is one of your biggest assets, but it is smart not to keep your money tied up in one investment. Using some of your equity to buy into long-term investments can provide you some added security for the future.
- Business expenses – some entrepreneurs use their home equity loan to help cover business expenses or even start their own business. It works particularly well for smaller businesses that can struggle to get a bank loan. If you are going to use your equity in this way, you’ll want to get the business to a profitable place as fast as you can. Doing so will help you manage payments and avoid defaulting on the loan.
Make the Most of your Equity
Your home equity is a valuable asset.
When used correctly, it can be a major part of your wealth-growing strategy.
Paying off a mortgage is like a long-term savings plan because you can cash into the equity in the future. But, it is important to understand how to make wise decisions with your home equity.
Being able to tap into your home equity can allow you to do things that you might not have been able to afford.
That includes buying different investments and adding to your assets, getting your dream business off the ground, or helping your child cover the costs of college.
Having a significant amount of equity in your home demonstrates to lenders that you are responsible with money.
It can unlock better rates and terms for you if you apply for a home equity loan.
Just be sure that you do your research so you can find the best rate.
It can also help to talk to a mortgage specialist about your options.