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Home Equity Line Of Credit Vs Mortgage Refinancing In Canada

When you own a home, you are not only making an investment in your own future, you are also stuffing money into a giant savings back that is there if you need it. If you’ve owned your own home and lived in for more than a few years, you’ve probably become familiar with terms like “home equity loans” and “refinancing.” Given how low line of credit interest rates are right now (and given how badly banks need new business in terms of new lending), these show up a lot in the marketing for banks.

Refinance Mortgage And Take Equity Out

These two items are somewhat different, but they both have to do with tapping that “savings account” that is your home. If you bought your house back before the crash of 2008, then you paid somewhere a higher percentage than today’s rates even if you had solid credit. Now you can get a loan at an interest rate at historical lows. Even with fees, refinancing could save you a ton of money over the rest of the amortization of your loan.

A home equity line of credit (HELOC) involves a slightly different sort of scenario. You’re happy with the interest rate on your loan, but your son is about to head off to college, and you haven’t been able to qualify for the low-interest loans that some colleges offer because of your income. So you find out that you could take out a home equity loan for significantly less interest expense than what he would pay if he had a student loan. This is a situation in which this sort of loan would make sense. Let’s take a closer look at the difference between refinance and taking equity out.

A refinance involves finding another lender to give you a new mortgage with more suitable terms and pay off your existing mortgage. In some cases, your existing lender will switch out the mortgage and issue the refinance as well.

A rate and term refinance simply alters your interest rate and the term of the loan. Unless there are some fees due at closing, no money changes hands. A cash-out refinance gives you some of the equity in your house in the form of cash. That’s what you would use to pay for your son’s tuition, or to pay off some high-interest credit card debt, medical bills and other similar expenses.

Before you take on a refinance, though, make sure you know what he closing costs will be. Expect to pay around 1-2% of the loan amount in closing costs, which means that if you are refinancing, plan to stay in the house for at least another year to see savings.

A home equity loan has your property as its security, which is why it generally has a lower interest rate than unsecured credit, either in the form of a loan or credit cards. You can either take out a traditional loan, which means you get a check for an agreed sum and then start paying back that principal with interest over he agreed term. If you take out a home equity line of credit (HELOC), that’s more like a credit card. You have approval to take out a set amount of money, but you don’t have to take it out right away, and you don’t have to take it all at once. You have a set draw period in which you can take out money, and if you do take it out, after the draw period ends, you start paying it back. It’s important to remember that in urban and rural markets you can get as much as 80% of your home’s equity out in a loan, provided your credit meets prime lender requirements.

Both the home equity loan and the HELOC come with closing costs, and the bank will ask your documentation to show that you qualify for it. A home equity loan will usually have a higher interest rate than your initial mortgage. However, be careful about lenders who advertise an introductory rate, because that low rate can spike after the introductory time period (maybe six months or a year), leaving you paying much more.

What Is The Difference Between An Equity Mortgage And A 2nd Mortgage?

Answer; Nothing. Both mortgages use the built up equity in a property to obtain funding for their desired needs. The only difference is a 2nd mortgage specifies the position of the mortgage. Technically, an Equity Mortgage position can be 1st, 2nd, 3rd, 4th etc. Amansad Financial generally only provide private mortgages in 1st and 2nd position.

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Ways To Take Equity Out Of Your Home

So you’ve been paying on your mortgage for over a decade now. You haven’t taken out open mortgages (because you didn’t like the higher interest rates) but you have socked away extra money so that at each mortgage renewal you’ve been able to make a bigger dent in the principal you need to roll into the next loan. Now, though, your daughter is about to head off to college, and you didn’t quite save enough to help her with tuition, fees, room and board.

Or maybe your husband has received a diagnosis of Stage III cancer. The treatments will be invasive and expensive. He will have to take an extended leave of absence from work, which puts you down to a single income while you’re making mortgage payments.

Or maybe you just got laid off from that middle management position that you had held for almost ten years. You’ve been looking for the last nine months, but nothing has come up to match your talents. Your wife has kept her job the whole time, so you’re not burning through your savings as fast as you might otherwise be, but you’re having a hard time making ends meet for the time being, and you’ve run up some big balances on credit cards, which carry a high interest rate.

All of these are good reasons to find out how to take equity out of a house. If you’ve been making those mortgage payments regularly for years, all that money is now sitting in your house – kind of like dollar bills locked inside a giant vault. If you need to use this money for something major that has cropped up – like the list of scenarios above – there are different options to help you take equity out of the house.

What Is Best Way To Take Equity Out Of Your Home

One of these is a home equity loan. Let’s say that you bought the house for $600,000 and have paid the mortgage balance down to $200,000. The home’s value has appreciated to $800,000, which means that you have $640,000 in equity (the difference between the appraised value and the mortgage balance owed). If your home is in a big city in Canada, prime lenders will generally let you take out a total of 80% of the home’s equity in loans. So, your balance of $200,000 would still give you $440,000 in borrowing room, because then you would still have $200,000 (20%) in equity. Private lenders on the other hand will generally max out at 75-85% in select urban communities, and 65-70% in select rural communities.

Obviously, you don’t have to take out the maximum amount. And if you want to have the money available to you quickly without having to start paying interest on a lump sum loan, you can also open what is called a home equity line of credit (HELOC). Imagine a credit card that uses your home’s equity as the available balance. In most cases, you have a draw period during which you can access this line of credit. At the end of the draw period, if you haven’t used any of the money, you don’t owe any interest or principal. If you have used some of the money, you have to start making payments on principal and interest – but just on what you actually used, not the amount for which you were approved.

Different ways to take equity our of your home or property

If you’re wondering if there are any other ways how to take equity out of a property, there is a cash-out refinance. In this case, you’re expanding your existing mortgage and taking the difference (after closing costs) in cash. So if you have that mortgage paid down to $200,000 and could borrow as much as $400,000 more depending on the loan to property value ration, what that means is that you could refinance, turning that $200,000 balance into $600,000, with the bank giving you a check for the $400,000 balance, less fees. Obviously, you’re signing up for bigger mortgage payments this way, or for a newly extended term of your loan’s amortization.

Many potential borrowers come to Amansad Financial every year asking “I don’t know how to take equity out of my house.” Amansad Financial niche market is sub-prime private lending. While this type of borrowing is not the ideal solution for everyone, the information is reviewed so that the best recommendation for their borrowing needs. If it is determined, that a private mortgage is not required, a partnering mortgage professional will take you through the prime lending options.

Equity takeout vs refinance

So how do you choose between equity take out vs refinance? Both have their advantages, and both have their drawbacks. In either case, you’re adding to what you owe on the balance of your home, so be careful, and only take out what you need. The scenarios that make either one ideal are slightly different, but if you have questions about your situation, call one of our refinancing specialists at Amansad Financial to get advice tailored to your needs.

Reasons to Take Out a Home Equity Loan or 2nd Mortgage

Three different vehicles exist to help you draw equity out of your house. One is the cash-out (equity take-out) refinance. This involves you enlarging your existing loan in order to pull out some cash. Here’s an example: let’s say you bought a house for $625,000 a dozen years ago. You’ve paid the balance of that mortgage down to $300,000 through some aggressive saving and some large down payments at the renewals, taking full advantage of pre-payment privileges and the appreciation of your home’s value thanks to changes in the market has driven your appraisal up to $800,000. You live in the heart of a big city, so lenders are likely to give you up to 80% LTV on the house. LTV means loan-to-value ratio, so if the value is $800,000, you can borrow up to a total of $640,000 against it. Given that you have a balance due of $300,000, you could take as much as $340,000 out in cash (less fees) to drive the loan up to 80% of the value. So, you would go to a lender (either your original one or a different one) and, upon approval, walk away with a check for $340,000, minus the fees, and have a new balance of as high as $640,000 on your loan.

Another way that you can take equity out of your house is a home equity loan. This is the form of a second loan that you take out on what you have already paid into your home through mortgage payments. If we go back to that earlier scenario, you could go to your original lender, or to another bank, and ask for a second loan for up to $340,000 (less fees). You would still owe that $640,000 on the house now, but you would have two payments each month. Both of these lenders could send you to foreclosure if you default on either loan, so make sure that you can afford the new payment in your budget.

A third way to take money out of your home is a home equity line of credit, or a HELOC. If you’re not sure exactly how much money you will need, then you can avoid the automatic payments that come with taking out a lump sum. When you gain approval for a HELOC, then it’s kind of like having a big credit card. You have the approval to take out a maximum amount over a period of time (known as the draw period). You only take out what you need, when you need it, and when the draw period ends, you start making principal and interest payments on what you took out. If you didn’t end up taking anything out, then you don’t owe a dime – the process of setting up the HELOC is free.

In addition to your own primary residence, we can also help you find home equity loans for any other property that you own, including rental properties, whether it’s a single family home, a townhome or even a duplex. Some lenders will not offer equity loans on manufactured or mobile homes, though, so understanding which type of property you want to use for equity will be an important part of choosing from among our network. 

Want to take out a home equity loan to pay off a mortgage? When you deal with a mortgage brokerage firm, you have access to different lenders with some unpublished special offers. If you approach a bank directly, though, then you should let your lending officer know that you are shopping the loan around with several different banks. Banks look for these loans to bring in revenue, so if you have an attractive lending profile and you mention that you are taking your business to multiple prospective lenders, your representative is more likely to bring you his best offer up front. Such metrics as the interest rate and the term of the loan have the most importance, as they will influence the cost of the credit over time – and the amount of time you have to pay the new loan back.

People take out home equity loans for many different reasons. The key questions you should ask yourself are: Can you afford the new payments? Are you either taking care of a legitimate financial emergency or saving money in the process?

The first question is the most important one. If you’re already behind the eight-ball with your mortgage payments, then taking out a home equity loan might not be the right answer. After all, your payment on your home will go up. So you might have a big pile of cash now, but that will go away more quickly than you think, particularly if this new, larger payment is just eating a bigger hole in your financial picture.

If you can afford the payments, then you should think about whether the loan will save you money over time. If you’ve run up your credit cards at double-digit interest rates (or even higher), you can save a lot of money by taking out a home equity loan at a single-digit interest rate. Your interest rate for a college loan is likely to be higher than what you would spend on a home equity loan as well.

You can take equity out of your house to do whatever you want with it. Once again, you want to ask yourself those two questions from the previous question. Can you afford the payments each month? Will you profit from your decision? In the case of an investment scenario, whether it’s more real estate or starting a different type of business, you may not be looking at a comparison between interest rate scenarios, but instead a decision to start an enterprise that may or may not succeed.

This takes you back to the first question. While you may have the best business idea in the world, what is your plan if the business tanks? Can you afford the larger mortgage payment anyway? If not, you may want to consider taking some of the equity of your home out for this purpose

You will find fewer lenders that are willing to extend you an equity loan on land that has no improvements of any kind on it. The reason for this is that lenders feel that a borrower who runs into financial difficulty is more likely to walk away from a vacant lot than he is to walk away from the place where he lives. Because of this elevated level of risk, you can expect to pay a higher interest rate and face a lower LTV ratio.

Lenders will generally advance up to 80% of the appraised value of your home. Like we explained earlier, this amount would be the sum of your existing balance owed and the new loan that you would take out. Example, if your appraised value is $1,000,000, and you lived in a major city (and had solid credit), you could take out a loan that would push your new total owed to $800,000. If your current balance owed is $500,000, then you could qualify for $300,000 more, less fees.

Credit is certainly an important factor in any lending decision. However, in the case of a home equity loan, HELOC or cash out refinance, you have likely built a track record of making your mortgage payments on time. Also, you have the house as collateral. However, your maximum LTV ratio (depending on location) may be modified than it would be if you had terrific credit, and you will likely face a higher interest rate than you would have otherwise. However, don’t assume that just because your credit has slipped a bit you won’t be able to get a home equity loan.

If your credit or income is doesn’t meet bank requirements, and private lending is required urban markets will generally advance up to 75%, however some will actually provide more than the banks… up to 85% of the property value is select markets, and up to 65-70% is non-urban markets.

Expect the lender to ask for satisfactory income verification such as job letters, and recent paystubs if you’re an employee. If you are self-employed and/or own rental properties, you will still have to provide proof of your income by way of 2-year tax returns and corresponding personal notice of assessments. Information about other assets such as savings and investment accounts may also be necessary. If the equity loan being requested is from a private lender, not as much documentation may be required if the LTV is below 65%. Every situation however is a case-by-case basis.

The lender will also require an appraisal in almost all cases, current mortgage balance, current mortgage balance information, and your property tax balance statement.

Once you provide your information to your lending representative, the brokerage or bank goes over the whole package – credit history, property value, income verification. These three factors determine whether or not you gain approval, and what your interest rate and approved LTV ratio will be. Banks generally take longer to provide an approval, however with Amansad Financial, we can generally issue a conditional commitment within 1-2 days upon receipt of application and some initial key documents.

Still have questions? Talk to Amansad Financial today. We have helped many customers get the loan they need. A home equity loan might be the best decision for you – but it might not. So reach out to us, and we will discuss your present situation, and then we will recommend the best option for you and your family.

At Amansad Financial, a lot of customers come to us with questions about home equity loans and 2nd Mortgages. We have helped people save money by paying credit card balances off by taking out loans against their home’s equity at a far lower rate of interest than what they were paying on those cards. Others have used some of the equity in their homes to help their kids start college without diving into the sort of debt that can leave them strapped for years out of graduation. Still others have either suffered a layoff or a medical problem well into middle age, and some of their equity has helped them make ends meet before they burn through their entire savings.

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Daniel K. Akowuah | Mortgage Professional / DLG Underwriter
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