If you have made payments on your mortgage for more than a couple of years, it is likely that you have built up a little bit of equity in your house. Making the minimum payments doesn’t do much for you in the way of building equity in the first few years you are in a property, because almost all of your amortized payment goes to paying off the interest expense. As time goes by, more of your payment goes toward principal, and if you have an open mortgage and pay extra each month, the extra amount goes directly to principal.
Home Equity Lines of Credit and Junior Mortgages in Canada
You may find, after a few years in your home, that you need to access the equity that you have built up in your house. You might decide to renovate the kitchen, either as part of flipping the house to sell or simply to improve the property for your own family. You might decide to use equity to help pay for college tuition for your kids. You might decide to take your wife for a cruise of the Mediterranean Sea for your twenty-fifth anniversary. You might have medical expenses crop up that you don’t have the savings to pay. Any of these are good reasons to access that equity, so the next decision is to choose between a loan against that equity or a line of credit that stands open.
When should you get a home equity loan? This comes in a fixed amount and is a one-time transaction. If you know that one event is coming (that cruise, or the renovations, for example) and you want a fixed rate on your loan, then a home equity loan is the better choice. You get your money all at once, and the loan simply becomes a junior lien against your property. You’ll make interest and principal payments on it each month, just like you are with your first mortgage. This makes it very important to ensure that you can afford both mortgage payments within your budget, because defaulting on either one can lead to default and foreclosure.
If you’re not sure exactly how much money you will need, though, and you may need access to that money over time, a home equity line of credit makes more sense. If you’ve already set some money aside for your children’s college tuition and fees, then you may not need to take out as much money as you think. Rather than having a larger loan that you need, having an open line of credit allows you to borrow as little as you need. You can open the line of credit and have access to it long before your first withdrawal, but you don’t start having to make interest and principal payments on it until you take your first withdrawal. Depending on the lender, you may be able to start making HELOC (home equity line of credit) payments with interest only, allowing you to add the obligation to your budget on a more gradual basis.
How do you know the equity you have in your house? The simple answer is the value of the home today less the amount that you owe on it. While one of those numbers is easy to figure out, though, the other can represent a bit of a gray area. To find out how much you owe on the loan(s), either pull out your most recent statement or go online and find the payoff amount. If you receive statements through the mail, calling the bank or lender can give you a more precise amount.
Figuring out how much your home is worth is a little stickier. Your property tax assessment from the municipality is a place to start, but those only come out once a year. If the market is in flux, your value might be a good bit higher (or lower) than the appraised amount. Talking to a realtor can give you an idea of comparable transactions in the last month or two — sales of homes in similar neighborhoods, with similar square footage and other markers of value — and you can use those to refine your value. Ultimately, an appraisal from a certified lender approved appraiser will provide the most accurate information.
If you are considering taking out a home equity loan or line of credit, talk to one of the lending specialists at Amansad Financial. We can connect you with the financing product that best serves your needs. We have helped many property owners in western Canada, and we can do the same for you.