A home equity loan is a way to leverage the value of your home for financial flexibility, allowing you to borrow money against the property while retaining your primary mortgage. Your home serves as collateral for both your primary mortgage and the home equity loan. Homeowners in Mississauga, Toronto, and the Greater Toronto Area often turn to home equity loans when they need a lump sum of cash without selling their home or refinancing their existing mortgage.

What is Home Equity?

Home equity represents the difference between what you owe on your home and its current market value. For example, if your home is valued at $1,000,000, and you owe $500,000, you have $500,000 in home equity.

The Benefits of Home Equity Loans

Homeownership offers the opportunity to build equity over time, and home equity loans provide a way to access this equity for various financial needs. Some reasons to tap into your home equity include:

  • Paying off high-interest debts, such as credit cards, property taxes, or CRA obligations
  • Addressing small business needs
  • Funding renovations or household repairs
  • Covering unexpected healthcare expenses or life events
  • Financing significant life expenses like weddings or post-secondary education
  • Managing the rising cost of living

Home Equity Loan Options

Home equity loans encompass a range of financial products that use your home’s equity as collateral. These loans often offer larger sums and lower interest rates compared to unsecured loans. Common types of home equity loans include second mortgages, Home Equity Lines of Credit (HELOCs), and reverse mortgages.

Second Mortgage

A home equity loan becomes a second mortgage when it holds a secondary position after the primary mortgage. The primary mortgage is repaid first in the event of a sale or foreclosure, with the secondary mortgage following. The amount you can borrow depends on your home’s equity, and repayment terms can vary.

Second mortgages are helpful when homeowners are hesitant to break their mortgage and incur fees, and if they’ve secured a low-rate mortgage they don’t want to give up. A second mortgage helps you overcome financial challenges or leverage your equity without breaking your current mortgage.

Second mortgages often come with lower interest rates and larger loan amounts compared to unsecured loans, making them a cost-effective borrowing option. In some instances, individuals with less-than-perfect credit or low income may still qualify for a second mortgage, offering an avenue to secure needed funds. A second mortgage is a great option for one-time expenses that have a fixed budget. In some cases, you may be able to borrow up to 85% of your home’s value when considering your first and second mortgage.

HELOCs – Access Flexibility

A Home Equity Line of Credit (HELOC) offers more flexibility than a second mortgage. Instead of a lump sum, you can access funds as needed and choose when and how much to borrow up to your limit. HELOCs are re-advanceable when you repay the amount you borrow. You can pay back the borrowed amount at any time without a prepayment penalty.  Keep in mind that HELOCs often require good credit and consistent, verifiable income.

HELOCs usually come with a variable interest rate, which means the interest rate can fluctuate based on market conditions, and you are usually only required to pay monthly interest. HELOCs are more flexible than second mortgages and suitable for ongoing or unpredictable expenses, such as home improvements, education costs, or managing financial emergencies.

HELOCs allow you to borrow up to 65% of the loan to value although both your HELOC and first mortgage cannot exceed 80%. If your first mortgage is paid off, you can get a HELOC up to 65% LTV.

Reverse Mortgages for Those 55+

If you’re 55 or older, you might want to consider a reverse mortgage, which gives you access to tax-free cash in a lump sum or through regular payments. The primary benefit of a reverse mortgage is that you aren’t required to make regular mortgage payments. Instead of making payments, you receive payments. The loan is repaid upon the sale of the home.

Joe Purewal, Mississauga Mortgage Broker, is here to help with your cash flow needs!

Trusted Mississauga Mortgage Broker Joe Purewal will assess your situation and outline the home equity loan that best meets your unique financial needs. Joe has access to a wide range of lenders that offer both HELOCs and second mortgages, including private lenders for your second mortgage needs. Contact us today, and let’s explore how we can leverage your home’s equity to help with your financial needs. Your financial well-being is our priority, and we’re ready to guide you every step of the way.

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