Equity is the amount of value in your home that’s paid off and mortgage-free. You can leverage it in different ways, including emergency repairs and consolidating high interest loans, to name just a few.
You can also use the equity you build up to invest in another property. Understanding the strategies you can use also means understanding the risks and rewards associated with each.
What Is Home Equity?
Equity is the part of your house you own that isn’t mortgaged. Calculating equity is easy: subtract any mortgage balances from your home’s market value. The equity you build up is just one of the perks of owning a property or home.
Every mortgage payment you make takes a portion of the principal that you owe. That means more equity comes your way each time. The value of a house or other property almost always appreciates in the long run, so you can accumulate equity by being in the market and paying off your mortgage at the same time.
Calculating your equity involves more than subtracting the outstanding amount you owe from the price you can get for your home. Homeowners must consider the current market value of their houses and properties. A comparative market analysis is a good tool for arriving at your property’s current market or fair market value.
You can use the equity you’ve built up to your advantage by taking out different types of loans.
Home Equity Loans vs. HELOCs
Understanding your options means knowing the differences between the available products.
Home Equity Loans
When combined with an existing mortgage, these are also called second mortgages. A home equity loan is a lump sum payment that can use your property or house as collateral. The amount you can get is based on the difference between the amount you owe on your mortgage and your home’s fair market value.
Homeowners can get the funds and make payments every month with a variable or fixed interest rate.
HELOCS
These home equity lines of credit (HELOCs) have a slightly different angle. You must use your home as collateral, often termed as a revolving line of credit. There’s a predetermined limit, and you can borrow the money you need. These don’t have fixed repayment schedules, but lenders generally require you to make interest payments on the amount you use.
You can even make your home equity work for you.
Investment Opportunities Using Home Equity:
It’s important to remember that property condition affects market value. Regular updates and maintenance can make a house more desirable on the market. Kitchen and bathroom upgrades and remodels can include double-sink vanities and upgraded appliances.
- You can also use your home equity to invest in another piece of real estate and build your wealth. The purchase of another home can generate income or just appreciate over time. Different choices in this category can include vacation homes and rental properties that can generate steady income streams.
- Some homeowners prefer to reinvest their home equity to make their finances healthier. Some people might want to consolidate loans to pay off high-interest debt like credit cards. For them, looking at a private lender means that they can use their equity if they have 25% or more built up. Private lenders don’t use the same criteria as more traditional banks and credit unions. People with damaged credit scores and alternative sources of income like sole proprietors, can apply.
Homeowners must consider that tapping into their equity means they’re turning part of it into debt. This requires some careful thought and information to weigh out what’s in their best interest.
Risks and Rewards of Using Home Equity:
Like any type of financial investment, you need to weigh the pros and cons of using your home equity.
The Rewards
- According to the Royal Bank of Canada, these funds can be used for various purposes, such as consolidating higher-interest-rate loans, emergency repairs, and home improvements.
- A home equity loan can also be the answer to an emergency. Although having an emergency fund is a good idea, a home equity loan can provide money for an unforeseen repair like a new roof. Consider that Homestars pegs the average price for an asphalt shingle roof at $8,200 in Toronto.
Using your Equity means that you can get a larger amount because it’s a secured loan, which means the money is backed up by the value of your house.
You must also consider some of the hazards of using your equity this way.
The Risks
- One of the first risks is one of the more obvious. If you borrow against the equity in your home, you’ll have less of it. That means you might not have the equity to cover an emergency, an unforeseen repair or another financial need in the future.
- You need to be careful with the kind of interest rate you choose. For example, a HELOC with a variable interest rate can increase if the Bank of Canada decides to raise its rates.
Your equity is tied to the market, so you must be aware of fluctuations on the horizon.
Future Outlook on Home Equity Trends:
Your home’s equity is measured according to the market where you live. Remember that you can build equity in two different ways: when your home appreciates in value and by making mortgage payments.
The predictions for Ontario in 2024 are a stabilizing market. When interest rates fall, the Ontario housing market will recover. According to the Canadian Real Estate Association (CREA), There might be as many as 50 basis points of cuts by the end of this year. They also predict that home prices will rise by 7% nationally in 2025.
Looking for Private Lenders to Help With Equity?
Mortgage Broker Store focuses on numerous mortgage-related products. One of our priorities is mortgages that don’t meet traditional lending institution requirements. Our team includes private lenders, brokers, and licensed mortgage agents. Let us help you prepare for and get a private loan that meets your specific requirements. Remember, these loans can pay off a mortgage that’s in foreclosure or power of sale and stop the process.
