The largest debt you will face as a homeowner is your mortgage. With proper budgeting, and a steady income, making each and every mortgage payment on time and in full certainly sounds doable.
But life isn’t so easy – there are always plenty of other bills to pay and other debt to pay off like student loans, car loans, home renovations, repairs, and pesky credit card debt. When your dollars are already stretched to their limits, it can be difficult to make even the minimum payments.
Did you know that as a homeowner, you’re in a unique borrowing position? With the right approvals, you can borrow against the equity of your home with a home equity loan.
A home equity loan is exactly as the name suggests - a loan secured against the equity in your home.
This type of loan is slightly different to a home equity line of credit (HELOC), which is a line of revolving credit with an adjustable interest rate. A home equity loan is a one-time lump-sum loan.
The loan amount is based on your mortgage value and the current value of your property. The Loan to Value ratio (mortgage value divided by property value) should not exceed 80% (or 90% with mortgage default insurance).
Being approved for a home equity loan is not as difficult as you may think. Lenders are generally comfortable adding to your current mortgage because they are safeguarded by the fact that your loan is secured against your home.
The primary bonus of a home equity loan is in its debt consolidation capabilities. Let’s say you have regular mortgage payments at a low interest rate of 4% over five years; plus, you have credit card debt at a 20% rate. By consolidating the two, a home equity loan will allow you to tackle your most pressing debt first – in this case the credit card debt. The amount you receive will be added to your mortgage term and rate.
The best way of going about getting a home equity loan is through a mortgage professional to find out which options will work best for your needs. Here’s what you should expect: