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What is a Home Equity Loan?

A home equity loan is a general term that is used to describe any type of loan that uses the equity of your home as collateral. When you have a mortgage on your house, you will build up equity as you start to pay it off. Your equity will be equal to the difference between the current value of your home and the unpaid balance on your mortgage.

Your home’s equity can increase in two different ways:

  1. When you pay off more of your mortgage.
  2. When your home’s value increases.

For example, if your home is valued at $500,000 and you have $200,000 remaining on your mortgage balance, then you will have $300,000 in equity available. However, if your home’s value increases to $600,000, due to changes in the real estate market, and you still have $200,000 remaining on your mortgage, then you will have $400,000 in equity available.

How Does a Home Equity Loan Work?

A home equity loan will allow you to borrow a specific amount, based on the current value of your home. Typically, you can borrow up to 80% of your home’s value less the unpaid balance on your original mortgage.

Remember that you will have to pay back the home equity loan at the same time as your original mortgage. The new loan will come with its own monthly installments and you will be charged interest accordingly.

There are a number of advantages to home equity loans. Typically, these loans have much lower interest rates than other types of loans. They also allow access to more funds than unsecured loans and have more flexible payment options. However, it is important to remember that you are using your home as collateral.

Top Reasons to Get a Home Equity Loan

The great thing about a home equity loan is that it allows you to spend the funds on anything that you might need for yourself or your family. Here are some top reasons why are customers have taken out a home equity loan:

  • To consolidate debts from other loans and credit cards.
  • To complete renovations on their home or cottage.
  • To purchase a car or another vehicle.
  • To pay tuition for a college or university degree.
  • To cover unexpected health care costs.
  • To provide financial help for family members.
  • To invest in stocks, bonds, or other investment vehicles.

At the end of the day, you get to decide how to use your home equity loan. Based on your plan, our team can advise you on the best option to cater to your specific needs. Talk to one of our brokers today to learn more.

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