A complete guide to getting a home equity loan and how it can be useful to you. Did you know that almost 1/3 of Canadians are concerned that they won’t be able to financially recover from the negative impacts of COVID-19? As a matter of fact, 41% of Canadians are already in a worse financial situation now than before the pandemic occurred.
Whether you are struggling financially because of the pandemic or for other reasons, a home equity loan can help. Read on to learn about home equity loans and how they can be useful.
What Is a Home Equity Loan? A Complete Guide
To get a home equity loan, you need to build up equity in your house. Equity refers to the difference between what you owe on your mortgage and what the home is worth currently.
For example, if you owe $100,000 on your mortgage and your home is worth $200,000, you have $100,000 of equity.
A home equity loan is a second mortgage loan that you can use to consolidate debt. These loans are paid off monthly, the same way you pay for the first mortgage.
Home equity loan financing is often approved based on the amount of equity in the home and is not really reliant on your credit or income. Generally, it won’t be the entire amount, but somewhere around it.
After you’ve been approved for a home equity loan, you’ll receive a lump sum. Over a set amount of time, you’ll pay the loan back with interest.
The number of years it takes to completely pay off a home equity loan depends on the terms you agree on with the lender. Your monthly payments are determined by the total amount you borrow and the terms and conditions of the home equity loan.
A Guide To Why A Home Equity Loan Can Be Useful
When you take out a home equity loan when it makes sense, you can reap the benefits.
First, a home equity loan can help you meet or improve financial goals. This means you don’t have to keep relying on your credit cards to make payments. They can help someone with bad credit build their credit back up again.
Compared to a personal loan, a home equity loan offers a fixed interest rate. As mentioned before, you’ll receive the amount in a lump sum. By borrowing these funds at a lower interest rate it will make it easier to improve upon your current budget.
Another benefit of a home equity loan that you won’t find with a personal loan is loan collateral. You’ll use your house as collateral meaning it is a lower-risk option than other loan types.
You’ll be able to use this money right away for what you need. If you use the money from a home equity loan for a home improvement project, you can deduct the interest on the loan when you do your taxes.
What Can You Use a Home Equity Loan for?
Perhaps the best benefit of a home equity loan is that you can use the money however you like. This type of loan can help with bad credit, debt consolidation, home repairs, and so much more.
If you have kids and want to help them pay for college, a home equity loan can work just as well for that too.
The self-employed may need extra money to start up a business or keep their business afloat. You can use a home equity loan for that too!
If you are currently experiencing financial hardship, a home equity loan may be help you improve monthly cash flow and consolidate some high interest debts.
Along with these reasons, there are other common ways people use their lump sums from a home equity loan such as emergency expenses, long-term investments, wedding expenses, etc.
The possibilities when you receive your lump sum are basically endless as there aren’t many limits on how you can use your loan.
Getting Approved for a Home Equity Loan
Now that you know how a home equity loan can be useful for you, we are sure you are wondering about the approval rates. The process of getting approved is similar to that of getting approved for a regular mortgage.
A lender will check your credit score and credit reports. You’re more likely to get approved for a loan if your credit score is higher. This also leads to a lower interest rate.
Credit is only one factor when you apply for a home equity loan. Lenders will check the monthly payments you currently have. They’ll also look into how much you pay on your primary mortgage.
Lenders may also ask for your gross monthly income or check it themselves. Your income determines just how much you can afford to pay on a monthly basis. Lenders often need to understand your plans to make the monthly payments and how the loan will help you get back on track.
A lender will have a home appraisal done to understand how much your home is worth. Homeowners that do not owe anything against their homestand to benefit from a faster approval than those that are heavily leveraged. Generally, a lender will give you around 80% of your home equity.
There can be many things that factor into getting approved for a home equity loan. Some of those factors are but not limited to:
- A credit score above 620
- Have at least 15% equity in your home
- Maintain a debt to income ratio no higher than 43%
When you look at a home equity loan vs. other types of loans, you find that they are easier to qualify for.
Why A Home Equity Loan Can Be Useful – We Can Be Your Guide
Because there are so many ways to use a home equity loan, it is not a bad option for most people. If you find yourself needing to catch up on debt, start up a business, or pay for an emergency expense, consider this loan type.
Once you’re approved, you can begin to reap the benefits by getting your funds in a lump sum right away! Contact us today to speak with an expert about your very own home equity loan.