How to Borrow Using Your Home Equity in 2021
Ontario homeowners are in an advantageous position. Home sales have increased overall during 2020 while the average home price has reached an all-time high of 932,222 which represents an 11.2% increase from this time last year. The real estate sector is thriving despite widespread job losses, threats to small businesses, and reduced hours for many Ontario-based homeowners.
Property owners in large urban centers, rural areas, and small towns throughout Ontario have not been immune, however to the economic consequences of the pandemic. Some homeowners may be facing financial difficulties including experiencing a hit to credit scores.
If an Ontario homeowner is facing ongoing household debt and damaged credit, a good option to consider is to tap into the existing equity in an owned property. Many Ontarians have put money into their homes to increase the overall value of their property. Why not make your property work for you?
What are Home Equity Loans?
One such way that your home can work for you is by considering a home equity loan. Banks, credit unions, trust companies, and private lenders offer home equity loan options. If an Ontario homeowner has been turned down by traditional lending institutions, a good option is to negotiate a private home equity loan through a private lender.
What exactly is a home equity loan? Simply put, a home equity loan represents a secured mortgage that is borrowed against the equity in your home. The loan will depend on the difference between the current appraised value of your home and the remaining unpaid mortgage remaining on the property.
Banks will require a very good credit score as well as proven yearly salaried income when approving home equity loans. Trust companies and credit unions will accept a slightly lower overall credit score but will still have fairly stringent criteria when determining mortgage loan eligibility.
Private lending options provide an Ontario homeowner the opportunity to take advantage of existing equity to fix short-term financial problems and can be negotiated despite poor credit or nontraditional forms of income including investment income or self-employed salary.
An Ontario-based private lender will assess the loan to value (LTV) of your property and will lend up to 75% LTV ( 75% of the appraised value of the property). For example, if a home has been appraised at 100,000 then a private lender will lend up to 75,000 dollars depending on other assets you may have and proven sources of income.
Home equity loans have flexible terms. Although they are secured mortgages, the interest rates tend to be higher than a standard 25 year amortized mortgage at 7% to 15%. A home equity loan is also considered a short-term loan with term lengths ranging from 1 to 3 years. A private lender will also generally require at least 20% equity in your home when negotiating a home equity loan.
The Home Equity Loan is structured as an open mortgage providing the option of ending the loan early with only a three-month interest termination fee to pay if you choose to end the loan before the end of the loan term. The most common home equity loan is a second mortgage although there other types of home equity loans options available including:
- Interest-Only Mortgage– The homeowner is only required to make interest payments and not the principal loan amount.
- Blanket Mortgage- In this mortgage arrangement to secure financing, the homeowner will secure the loan against several properties.
- Construction Draw Mortgages- This mortgage loan allows the lender to pay for ongoing construction costs
How Does a Home Equity Loan work?- Steps To Take
The process of applying for a home equity loan is straightforward. There are basic steps to follow including:
- Arranging for a recent appraisal of your property
- Obtaining your beacon score from one of the two Canadian reporting agencies, Equifax or Transunion, and work to improve it.
- Making a list of all your outstanding debts along with corresponding paperwork
- Gathering all other paperwork including proven sources of monthly income, a recent appraisal and a list of any additional assets to bring to a meeting with a private lender.
- Sitting down with a private lender to negotiate mortgage rates and loan amount
Most Ontario homeowners look at home equity loans as a viable option for several reasons:
- To consolidate multiple debt payments
- Negotiate a lower monthly interest rate on debt payments
- Make one lump monthly payment rather than multiple debt payments.
Pros and Cons of Home Equity Loans
The tangible pros include:
- Lower monthly payments
- Access to money that can be used for different financial needs
- Negotiated lower fixed interest rates
The possible Cons include:
- The money is paid in one lump sum which may not be your preferred option.
- Your home is used to secure the loan so any missed payment may put your home at risk.
- Once the equity is used up for other purposes you have lost that equity
Home Equity Lines of Credit?
Another option open to an Ontario homeowner that is based on the equity in your property is a home equity line of credit (HELOC.) Unlike a home equity loan, a HELOC is generally a variable, short-term secured mortgage loan and represents a revolving line of credit as opposed to fixed monthly payments.
Interest rates on privately negotiated HELOCs remain similar to home equity loans at typically 7% to 10%. Fees range between 3% and 6% as with most private home equity loans. Private lenders will likely look for at least 20% existing equity and Ontario-based private lenders will lend up to 75% LTV.
Mortgage Broker Store will Help Provide Mortgage Solutions Using the Equity in Your Home
Mortgage Broker Store has years of experience and expert knowledge about home equity loan options. With access to a broad network of Ontario-based private lenders, we will be able to connect you with a lender who will negotiate mortgage terms based on your financial objectives and unique set of circumstances. Don’t hesitate to contact us at your earliest convenience to answer any concerns you may have. Let the equity in your home give you financial peace of mind.