USING YOUR HOME EQUITY
Using your equity
Is it time to renovate that kitchen or put an addition on your home? Or maybe you're tired of paying those high-interest credit cards. Or you're considering purchasing an investment property. If you're self-employed, you might need a cash infusion. So where do you get the money? Well, if you have enough equity in your home you might be able to borrow against it. Your home's equity is an asset you can use either by borrowing against it with a second mortgage or a home equity line of credit (HELOC) or by refinancing. There are pros and cons to all three options. Let's take a closer look at the options:
This is an entirely new loan on the property and pays out the existing mortgage. You can choose to refinance to take advantage of a lower interest rate or take out cash to pay off debts or to renovate. There has to be sufficient equity since you can only refinance up to 80% loan-to-value (LTV) through conforming lenders. However, if you're in the first year or two of a fixed-rate mortgage, the penalty to refinance may be onerous.
A second mortgage is a separate loan on the property, but is still secured by the property. This is a popular way to get much-needed cash quickly -- the application process is fast, as is the turnaround time. Second mortgage lenders focus on the property and the equity available. The interest rate will likely be higher because a second mortgage is riskier than a first. For example, in case of default, the first mortgage lender has the first right to proceeds from a sale or power of sale. However, there are situations when a second mortgage can be advantageous, especially if you already have a great mortgage rate on your existing first mortgage.
Home Equity Loans and Lines of Credit (HELOC)
A HELOC can be a standalone first mortgage or an all inclusive collateral mortgage. The loan is approved using the same basic criteria as a mortgage loan. The full amount of the money is made available up front, and you can access as much or as little as you want. It's an installment loan that acts as a revolving line of credit. You access the credit line online, by using a cheque, credit card or by using your debit card. The "credit limit" is determined by the equity, but you'll only pay interest on the funds you use.
Whether you choose any of these options depends on your financial needs and situation. For example, if current interest rates are lower than the rate on your existing first mortgage, refinancing may be the best choice. However, if rates are up, taking out a second mortgage might make more sense. Or, depending on what your needs are, selecting a HELOC may be the way to go.
Together, we can determine the best option that fits your needs. I will work closely with you to ensure you're achieving your financial goals. To find out which of the three options suits you, call me today.
CMHC CONSUMER NEWSLETTER
What is your credit score, and how can you improve it?
Your credit score is a number that illustrates your financial health at a specific point in time. It is also an indicator of how consistently you pay off your bills and debts. Your credit score is one of the factors lenders consider when qualifying you for a mortgage. A good credit score, for example, can help improve your chances of being approved.
To find out your credit score, contact Canada's two credit-reporting agencies: Equifax Canada and TransUnion Canada. These agencies can provide you with an online copy of your credit score as well as a credit report - a detailed summary of your credit history, employment history and personal financial information.
If you find any errors in your report, notify the credit-reporting agency and the organization responsible for the inaccuracy immediately.
If you want to improve your credit score,
- always pay your bills in full and on time;
- pay off your debts as quickly as possible;
- never go over the limit on your credit cards;
- and try to reduce the number of credit card or loan applications you make.
Once your credit score has improved, work with your mortgage professional to obtain a mortgage that works for you.
Find Out MoreTo find out more about credit scores and reports, visit the Financial Consumer Agency of Canada website and download or request a free copy of their guide, Understanding Your Credit Report and Credit Score. This guide provides practical, straightforward information on how to obtain and understand your credit report and score, as well as how to build and maintain a good credit history.