A home equity loan is a great way to borrow against the equity you’ve built up in your home. Against the backdrop of a strong Canadian housing market and near record low interest rates, it continues to be an excellent time for property owners to consider taking out a home equity loan.
Common Myths about Home Equity Loans
There are a lot of misconceptions about what a home equity loan is and how it can be used.
Myth #1: A Home Equity Loan and Home Equity Line of Credit Are the Same
A home equity loan and home equity line of credit (HELOC) might sound alike, but they are very different financial products, even though they both use the equity you’ve built up in the property.
For starters, “home equity” is the difference between the value of your home and the remaining balance on the current mortgage. Every time you make a mortgage payment your home equity increases. Your home equity also increases as the value of your home increases.
A HELOC is a revolving line of credit that lets you borrow against the equity in your home. You can withdraw money when needed and you only pay interest on the amount you borrow.
A home equity loan works like your primary mortgage and is sometimes referred to as a second mortgage. You receive a fixed amount that is payable over a predetermined period time with a fixed interest rate and set monthly payments. You start to pay interest on the entire amount as soon as you receive the home equity loan.
Myth #2: You Can Only Use a Home Equity Loan for Home Improvements
The money you secure for a home equity loan can be used for whatever you like. A lot of people take out a home equity loan for home improvements, but you could use the money to buy a second property, pay for a college education, consolidate debt, or anything else.
Myth #3: Foreclosures on Home Equity Loans are Common
A home equity loan is secured against your property. Because it was taken out after your primary mortgage, it is second in line to get paid off in case of a default. While it is true that a borrower could lose their home for not making payments on their home equity loan, it rarely happens in Ontario.
Myth #4: Preapproval Is Guaranteed
Just because you have a house doesn’t mean you’re guaranteed to get a home equity loan. A lender might preapprove you for a certain amount, but they could back out of the home equity loan or renegotiate the terms after they take a closer look at your financial situation.
How Do You Get a Home Equity Loan?
The requirements for getting a home equity loan can vary depending on who the lender is. The bigger the lender (ie. Canada’s big banks) the stricter the lending rules.
A loan-to-value ratio lower than 80%:
To get a home equity loan, you need to actually have equity in your home of at least 20% of its value. This number is determined by an appraiser.
A debt-to-income ratio of 43% to 49%:
This ratio is the percentage of monthly gross income that goes toward paying your debts.
A credit score of 620 or higher:
Credit scores (300 to 900) show how likely you are to pay your bills on time. The higher the score, the lower your risk. To get the best rate, some lenders insist on a minimum score of 680.
Reasons Why You Might Not Get a Home Equity Loan
Again, having a home does not mean you’ll qualify for a home equity loan, even if you’ve built up substantial equity. Since you secured your first mortgage, things might have changed that will make it more difficult for you to pay a home equity loan back.
Some things that could prevent you from securing a home equity loan include:
- You are self-employed and cannot verify your income
- Your credit history has weakened
- You have taken on too much additional debt
- New mortgage rules
- The value of your house has dropped
FAQ about Home Equity Loans
Q. Is It a Good Idea to Take Out a Home Equity Loan?
A. There is no one size fits all approach to home equity loans. But there are a lot of advantages to taking out a home equity loan. One of the biggest benefits is the lower interest rate. If you’re consolidating debt, credit cards can charge interest as high as 30%. A home equity loan will also have a lower interest rate compared to loans that are not backed up by the equity you’ve built up in your home.
Q. Can I Get a Home Equity Loan if I’m Unemployed or Have Unreliable Income?
A. If you go to one of Canada’s big banks and ask for a home equity loan, if you’re unemployed or have unreliable income, chances are really good you’ll get turned down. Even if you’re self-employed, the big banks can discriminate against you.
Q. Can I Get a Home Equity Loan with Bad Credit?
A. Traditional lenders only really want to lend money to homeowners with high credit scores. This shows you’re good with money and chances are good you’ll pay your home equity loan back. But there are many reasons why your credit took a hit, and it’s not always your fault. The big banks don’t care though. Even if a traditional lender does offer you a home equity loan, they won’t be giving you their best rates.
The same thing applies if you’ve declared bankruptcy and want to take out a home equity loan. Traditional lenders see you as being a risk and could charge you a premium for a home equity loan.
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Canadalend.com, Helping Homeowners Get a Home Equity Loan
Fortunately, there are private lenders that specialize in providing home equity loans, even to those who are self-employed, have unreliable income, or bad credit. And Canadalend.com can help you with that.
Private lenders do not have to follow the same strict lending guideless that Canada’s big banks and trust companies do. Unlike the big banks, private lenders provide you with more freedom, flexibility, and options. At Canadalend.com, we have access to hundreds of different lenders. That means we can find you a lender that will provide a home equity loan.
It’s your equity, you should be able to take out a home equity loan on your terms. If you’re a homeowner and are looking to take out a home equity loan, contact Canadalend.com today or apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.