Investing in real estate is a time-consuming process that requires a variety of data, calculations, and approvals. Thanks to the increasing prices of houses, the popularity of home equity loans has risen and has become an appealing way to leverage wealth for Canadians. While most homeowners are aware of the concept of equity, they may not completely understand how it functions or the various forms of equity loans available.
If you are looking for home equity loans in Vancouver, visit Alpine Credits now. Here’s all that you need to understand about home equity loans.
What is a Home Equity Loan?
A home equity loan is a form of loan that lets you borrow money against the equity in your home. Home equity can be understood as the value of your home, free from any liabilities. This is derived by subtracting any liabilities from the current market value of your home.
However, there is an upper limit on the amount that can be borrowed, which is set at 80%. This means that the initial loan can be used to borrow up to 80% of the total amount borrowed.
What Type Of People Should Consider Taking Out A Home Equity Loan?
A home equity loan is usually the best option for consumers who need money for a single large investment, such as a home improvement project. Borrowing small sums of money with a home equity loan is usually not worth it.
Since borrowers receive their home equity loans in one lump payment, it is an excellent option to access your equity if you know exactly how much money you’ll need.
- The equity in your home can be used to pay for college or home improvements.
- It may also assist you with debt consolidation if the loan allows you to pay off your debt sooner or at a reduced interest rate.
What is a Home Equity Line of Credit (HELOC)?
A home equity line of credit or HELOC is a revolving credit line that you can use for a specified length of time, pay it back, and use again. The draw period is usually ten years long, while the repayment duration is ten to twenty years long. It usually begins with an adjustable rate and then transitions to a fixed rate.
A HELOC works similarly to a credit card in which you don’t have to borrow the whole amount of the loan, and the available credit is restored when you repay it. You only pay interest on the amount you actually take from the available loan, and you normally don’t have to start repaying it until the draw period has ended.
Home equity lines of credit are ideal for people who want undetermined amounts of money over time, such as businesses. However, you can choose a HELOC instead of a home equity loan if you’re going to borrow only the amount that you need.
How Can You Get Approved For A Home Equity Loan Or A Home Equity Line Of Credit (HELOC)?
Even though home equity loans and HELOCs are two separate loans with their own set of terms and perks, if an applicant qualifies for any one of them, he would almost certainly qualify for the other loan.
The specific requirements differ depending on the lender. However, if you achieve these basic requirements, you will most likely be selected.
1. A Minimum of 15% to 20% Equity is Required
You have equity when the market worth of your home exceeds your mortgage balance. Lenders will require that you have at least 15% (ideally 20% or more) equity in your house, as verified by an appraisal.
2. Credit Score Over 600
Credit score requirements differ from one lender to another. For a home equity loan, a credit score of 620 or above is recommended. On the other hand, a home equity line of credit may require an even higher score. A high score (700 or more) usually indicates an easy qualification process and access to the best rates.
However, if a person has a significant amount of equity in a house and a low debt-to-income ratio, they might be able to get a home equity loan even if they have negative credit.
3. A Debt-to-income Ratio of 43% or Less
The debt-to-income ratio, or the money left with you every month after debt repayment, will also be considered. Lenders prefer a debt-to-income ratio of 43 percent to 50 percent, while some may require even lower numbers.
To calculate your DTI, sum all of your monthly debt payments and other necessary financial expenses (mortgage, student loan, regular bills, child support, and other debt) and divide them by your monthly income.
Pros and Cons of Taking a Home Equity Loan
Before filling out loan paperwork, think about the advantages and disadvantages of home equity loans.
Pros of a Home Equity Loan
- A set interest rate will be charged: The interest rate you agree to is the rate you’ll pay over the loan’s life. Even if the Federal Reserve raises interest rates, you would not be bothered by it.
- You’ll be able to borrow money at a lesser cost. When compared to other types of loans, using real estate as collateral usually results in lower interest rates.
- Your monthly payments will remain unchanged. Since you’re borrowing a single lump sum and paying a fixed interest rate, your payments will be consistent throughout the term of the loan.
Cons of a Home Equity Loan
- You might have to pay higher interest rates. Unlike a home equity line of credit (HELOC), a home equity loan’s interest rate does not change with the market, hence the rate is often higher.
- Closing charges: You’ll probably have to pay closing expenses, as with most real estate loans. These fees might cost anything from 2% to 5% of the total loan amount.
- There will be two mortgage payments for you to make: If you still have a primary mortgage, you will have two mortgage payments, reducing your discretionary income and tightening your monthly budget.
Endnote
A home equity loan is a good option if you have an upcoming lump sum payment to make. You can get enough cash by tapping into your home equity. It comes with the benefits of low-interest rates and a longer repayment period.
However, make sure you talk to an expert before making significant financial decisions such as getting a home equity loan.
