If you are a homeowner, you’ve probably heard people talk about the benefits of a home equity loan or second mortgage when it comes to funding renovation projects or consolidating debt. But what are these benefits, and how do home equity loans stack up against other forms of borrowing?
It takes decades to pay off the average Canadian mortgage, and some homeowners are rightly concerned about extending this timeline by adding a second mortgage on top of the existing one. But the fact is that the benefits of a home equity loan or second mortgage far outweigh the risks: they are often the most affordable and responsible borrowing options available.
If you are interested in taking out a home equity loan or second mortgage — or you simply want to know more about home equity loans and the advantages they offer, this article will help explain which option is best for you, and how you can apply.
Home Equity Loan vs. Second Mortgage: What’s the Difference?
Before you can understand the advantages of a home equity loan, you first need to understand how a home equity loan differs from other types of borrowing. So, the first question is what is a home equity loan — and how is it different from a second mortgage?
A home equity loan is a type of secured loan that is taken out against an existing form of capital (in this case, the equity you have built up through homeownership). Unlike an unsecured loan like a credit card or line of credit from a bank, a home equity loan is backed by an asset of tangible value: your house.
The difference between a home equity loan and a second mortgage home loan is really a technical one: banks and mortgage brokers may offer different types of home equity lending products, including home equity lines of credit (HELOCs) and lump-sum loans, while “second mortgage” is a more general term for any type of loan that is backed by home equity.
All home equity loans are a type of second mortgage, but not all second mortgages take the form of a home equity loan.
Why Take Out a Home Equity Loan?
The primary benefit of a home equity loan is that it allows you to borrow significant sums of money at a lower rate of interest.
When you take out an unsecured loan, the lender will only approve the loan if they have good reason to believe you have the means and intention to repay it: essentially, they are taking an informed risk based on general economic conditions, and on your income and credit history.
To make this risk worthwhile, the lender will generally charge a high interest rate — nearly 20%, in the case of credit cards. If you are borrowing a large sum of money, that interest quickly compounds, making the loan prohibitively expensive.
But because home equity loans are secured, i.e., backed by an asset, the lender knows they will be able to recoup their money in the event of a default. If you don’t pay the loan back, your asset will be forfeit. This reduces the risk, and drives down the interest rate.
A home equity loan from an experienced mortgage broker like Burke Financial gives you access to up to 85% LTV, which can translate into hundreds of thousands of dollars of money available to borrow depending on your property value and how much of your mortgage has been paid off. And the interest rates on these loans are considerably more competitive than the rates available through unsecured debt.
As a second or additional mortgage, a home equity loan will be paid off second in the case of a default — the primary mortgage takes precedence. This means there is still a certain degree of risk for mortgage brokers that offer home equity loans, so the interest rate will likely be higher than the interest rate on a standard mortgage. But it will still be lower than it would be for an unsecured loan.
Advantages of a Home Equity Loan for Borrowers with Bad Credit
One of the advantages of a home equity loan for borrowers with bad credit is that it may be the only way to borrow significant amounts of money. If your credit score is below 650, you may not be approved for an unsecured loan, which can cause problems if you need large sums of capital for debt consolidation or home maintenance.
When you apply for a home equity loan through a mortgage broker like Burke Financial, you have access to a range of potential lenders, and your mortgage broker works on your behalf to find a lending agreement that works for both parties.
While your credit score will impact the rate of interest available to you, one of the benefits of a home equity loan is that you can negotiate a payment plan that works for your current financial situation, ensuring you get the money you need and a repayment timeline that suits your budget and income.
Smart financial decision making always starts with understanding leverage: how the assets you hold can be used to put your money to work for you. The home equity loan advantage means that you always have the ability to raise funds at comparatively low interest if you need them.
Whether you’re trying to get back on track through debt consolidation or simply want to renovate your bathroom, a home equity loan is the best way to get a low interest rate, a manageable payment timeline, and a source of wealth that is secured by the growing real estate market.
If you want to enjoy all these benefits of a home equity loan, get in touch with Burke Financial today!