What is a Home Equity Loan How Does it Work

One of the most significant benefits of homeownership is the ability to build equity over a period of time. Your home equity is determined by your property’s market value and the amount of time you’ve been making mortgage payments. The more equity you earn, the greater the possibilities.

Homeowners across Canada look to the equity in their home as a solution for paying off debts, reinvesting in the form of home renovations and more.

Understanding the details of a home equity loan and how it works doesn’t have to feel overwhelming. Even if you’re a novice homeowner, Burke Financial has all of the information you need to make the right decision for your household.

What is a Home Equity Loan?

Home equity loans – sometimes referred to as private mortgages – are expedited, lump-sum loans secured using your house as collateral. The interest rate on a home equity loan is often considerably lower than unsecured loans. The lender will outline a payment plan that the borrower must follow and, once the equity is acquired, it’s up to the borrower how they choose to spend their capital.

A home equity loan is used for many reasons in households across Canada. A principal benefit is that the borrower has the freedom to use their equity in any way that benefits their financial goals. Some homeowners choose to use the money to improve their property and raise its value, while others may need the equity to pay for an unexpected medical expense.

What a Home Equity Loan Can Be Used For

Simply put, a home is the most significant purchase most people will make in their lifetimes. The wealth stored in a home is a precious resource that can precisely help you achieve your goals.

Once you’ve been approved for a home equity loan, you have the freedom to decide where your money should be spent. This is an opportunity for homeowners to reinvest or build their profits, and the possibilities are almost endless.

Build a Business

Deciding to take the leap and start a new business is as exciting as it is nerve-wracking. A home equity loan in Canada offers entrepreneurs the chance to use the equity they’ve earned to invest in other areas of their future. By simply paying your monthly mortgage, you’ve unlocked a resource that can help you succeed as a self-made professional.

Invest in Education

If you’re a homeowner and interested in pursuing your education, you don’t have to compromise your budget or plunge into student loan debt to achieve your goals. ___ The interest rates on home equity loans are low enough that you can still maintain your home without stressing over your expenses. You’ll have a fixed payment plan in place that you can plug into your current budget.

Pay for a Major Renovation

Your home is already your most significant investment, but the value doesn’t stop at the point of purchase. Using your home equity as a home improvement loan to re-invest in your property has the potential to increase your market value drastically. Whether you’re looking to transform your bathroom, update the kitchen, or polish up the landscaping, a home equity loan can help Canadian homeowners invest back into their home.

Unexpected Home Repairs

When a pipe bursts in the bathroom or your roof begins to leak, the last thing you have is time to wait for a traditional loan. You’ll spend more time filling out paperwork and jumping through hoops than fixing the problem in the home. Utilizing a home equity loan in Canada is a secure way to ensure you never need to worry about the safety of your home.

Celebrate a Milestone

Just because the loan you’re taking out is on your home equity, that doesn’t mean the money needs to stay within the home. Sometimes significant milestones like a wedding require extra capital. If you can make the payments without sacrificing your healthy budget, you can use your earned equity to celebrate those joyous moments in life.

Consolidate your Debt

If you’re trying to balance multiple creditors, a mortgage debt consolidation loan on your home equity could be the relief you need. With a single lump-sum payment, homeowners can pay off their high-interest debts and focus on a single, low-interest monthly payment.

How Much Money Can I Borrow?

The amount of money you can borrow will vary according to your lender and generally depends on a few factors. One of the most important factors is the amount of current equity you have in your property.

So what constitutes your equity, exactly?

Simply put, your home equity is equal to the difference between your home’s value and the unpaid balance of your current mortgage. For example, if a person had a home worth $350,000 and $100,000 still outstanding on their mortgage, you could say they have $250,000 in home equity.

The more equity you have in the property, the more money you can borrow. Many homeowners don’t realize that they are sitting on such a vast reserve of untapped value, one that could come in handy should a significant expense unexpectedly appear on the horizon.

Homeowners across Canada often choose to work with a mortgage brokerage in Toronto like Burke Financial to help them through the detailed process. Your application is shopped around to a large network of banks and private lenders with an experienced broker. With Burke Financial’s help, you’ll acquire the lowest interest rates available, putting more money in your pocket.

How Can I Increase My Home’s Equity?

Home equity increases when homeowners pay down their mortgages and as the property’s value increases over time. However, those who don’t want to wait for time to tick by can speed up the process by doing well-targeted home renovations. By reinvesting capital into the structure and landscape of your home, you’re showing potential buyers that your property has real value.

In this way, borrowing in the short term can improve your long-term financial health. Using your home equity loan to fund home improvements, you can turn your loan into a profitable investment. Under the right circumstances, using a home equity loan in this way can quickly increase the value of your property, making you richer sooner.

Homeowners that have paid down large portions of their mortgage (as well as those that saw their property value increase in recent years) could be in for a pleasant surprise when they learn exactly how much they could be eligible to borrow.

The Security and Stability of Home Equity Loans

When you take out a loan, the last thing you want to do is worry about interest rates going up and down, changing your payments’ size. You already work hard to pay back your loans every month, so why work harder than you need to?

Home equity loans are beneficial because they operate on fixed rates and terms. That means that lenders set up a payment schedule in advance so that homeowners can rest easy, knowing their payments are always on time and are always the right amount.

This peace of mind allows borrowers to focus on their projects and goals without the need to worry about variable interest rates.

With the help of the experienced professionals at Burke Financial, homeowners can understand exactly what is needed to get a home equity loan in Ontario. Our mortgage brokers have a wealth of connections and a network of banks and private lenders. With their help, you won’t worry about the security of your loan agreement or the lender you’ve chosen. We will ensure you’re getting the best possible interest rate, keeping your budget stable and healthy.

While the benefits of a home equity loan are considerable, there are essential loan components to keep in mind. A home equity loan uses your home as collateral. If you can’t pay it back, you may lose your home. Borrowers should always understand the risk associated with and home equity loan they apply for.

Burke Financial’s brokers are with their clients every step of the way, so there are no misinterpretations or faulty agreements from alternative lenders.

Is a HELOC Similar to a Home Equity Loan?

When homeowners think of an equity-based loan, they often think of a home equity line of credit. Unlike a fixed-rate home equity loan, a HELOC is a revolving capital source that acts as a middle ground between a checking account and a credit card. Borrowers can access the funds as needed once given a set amount of credit.

HELOCs are common among borrowers who need access to funds immediately, whether it’s for a medical emergency or a necessary home repair. This type of loan still charges interest, but only when the borrower can access the money. HELOCs can land borrowers in hot water due to the readily available credit line, as some homeowners will use the cash for nonessentials.

Deciding which type of loan you should access is an important decision, one that you may wish to consult a professional for their insight. The mortgage brokers at Burke Financial help clients across Ontario discover their loan options, identify their financial goals, and match them with the right alternative lender.

A Second Mortgage vs. Home Equity Loan

The difference between a second mortgage and a home equity loan isn’t as different as you may think. They’re both borrowing options that require homeowners to use their property as collateral to receive a substantial loan. A second mortgage is considered a type of home equity loan, and the terms are typically interchangeable.

Homeowners should consider the benefits of getting a second mortgage as they offer a significant amount of capital with low-interest rates and potential tax benefits.

Is a Home Equity Loan the Right Choice for You?

Now you know what a home equity loan is and how it works. You have the information at your disposal, and you know exactly what to look for in a lender.

With the right broker leading the way, home equity loans are the perfect vehicle to help homeowners achieve their goals. Whether you’re navigating a financial storm or plotting a course to the future, your best bet is always to do some research, speak to an expert, and try to ask the right questions. Understanding what is needed for a home equity loan and what your application says to lenders can be detailed. Before you reach out to any lenders on your own or sign a loan agreement, get in touch with a professional broker.

Burke Financial has helped Canadians navigate their borrowing options and make the most of their investments for years. Their award-winning team works with homeowners at every credit level, matching their finances with a lender who can fit their needs. They specialize in communicating with lenders on behalf of their clients’ needs to get the lowest possible interest rates and establish a successful payment plan.

With the help of a mortgage broker at Burke Financial, navigating home equity loans doesn’t have to be a daunting or nerve-wracking experience. When you have a mortgage professional in your corner, you can rest easy knowing you’re getting sound financial advice.

Contact us today to learn about your home equity loan options.