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You will have seen adverts all over television, radio, and newspapers urging you to consolidate your debts. This can be done by using the equity of your home so you no longer have to pay the high interest rates on credit cards and loan repayments. It sounds like the best thing to do. But be warned there are risks! You still have the same debt to pay; only now it is linked to your home. Therefore, if you miss payments, your home will be at risk. The worst that can happen if you miss a credit card company is that you will have to answer to the Credit Company and you can miss a few payments before they call in debt collection companies. Even then you still have your house. However, with an equity loan if you miss even one of your monthly payments then you may have your house taken away from you by the bank. This is called foreclosure and it is important that you work out that you can make the repayments before taking out the loan.
Before we get into more complex details of equity loans, lets look at a few basic terms. Equity is a form of secured loan, which means that the loan is secured by the debtor's property and equity is how much of your home that you actually own. To work out the equity value of your house you need to take the value of your house on today's market and take away any loans that you have that are secured on the property. The equity is this difference and can change depending on economic conditions. Unfortunately, even though the equity is the part of the house that you own, you cannot sell this portion. Instead, you can get hold of the money through a home equity loan, this is also known as a second mortgage. This money can then be used however you wish.
In recent years, there has been an increase in the value of our homes, partly due to low interest rates and this has led to an increase in the equity value of our homes. However, as interest rates begin to rise again, the equity on our homes will begin to fall. If this happens, you could actually end up owing more than your house is worth and this is called negative equity. There is obviously a danger than you will come to the end of your mortgage time and still owe a huge amount of money and therefore your mortgage time is increased.
It's not all bad news though. One of the great benefits of equity loans is that the interest rates are a lot lower than on credit cards and unsecured loans. This means that the total amount that you pay back is less than if you kept your debts with the original credit cards and loan companies. Also, the borrower can help to decide, within reason, the amount that is to paid back each month so that the monthly payments are not excessive of their monthly earnings.
There may also be tax benefits to taking out an equity loan. You would need to speak to an accountant before rushing in and getting a loan. You should go to an independent financial advisor since you may be encouraged that this type of secured loan is the best thing for you to do by banks. This is because home equity loans are secured on your house, therefore there is less risk for the lender since if you don't make the payments they will take your house and sell it. They still get their money back so can't lose!
If you take out a home equity loan then you cannot sell your house while there is still an amount outstanding on the loan. This is because the loan provider keeps the property papers and you are unable to sell your house without these papers. These are then returned to you when the loan is paid back.
You need to think carefully before taking out an equity loan. Consider whether you actually need the money. If it's just to fund a spending spree or to take a holiday, is it really worth risking your home. You could always save each month and never have to risk your home. You don't want to waste this money since this us most peoples only form of considerable assets or savings.
Hopefully this will provide you with information to make an informed decision on whether an equity loan is right for you.
Home equity loans provide solution for home owners in Canada to get household financing planning back on track. That is, unless you have a rich uncle to smooth out the stresses of the accumulation of debt, high interest rates, and/or needing some extra cash for education opportunities or a much needed extended holiday. Equity loans in Canada can provide a financing solution for diverse “problems” from debt consolidation to home renovations to unexpected emergency expenses.
That being said, what is a home equity loan anyway? Well, first you need a home. The value of your home, minus any mortgages or debts secured against your home's value, represents your equity. Then the loan part arises when you make a contractual promise to repay a sum of money, in exchange for the promise of a creditor to give you a sum of money, with the promise secured against the equity in your home. So combining equity and loan, as defined, you are borrowing money from a lender who knows that the property you own will be the security against the money borrowed.
The benefits of using an equity loan as opposed to obtaining an unsecured loan or using a credit card is that the interest that is established is much lower than for unsecured loans as or credit card debt. Also more good news is that, if you are accessing the built up equity in your home to support your own business or for investment purposes, the interest you pay on the loan may be tax deductible.
There are two types of equity loans in Canada: closed end and open end. A closed end equity loan (usually described as a second mortgage, or simply as a home equity loan) is when a borrower receives a lump sum of money and is not able to borrow any further, Closed end mortgages will generally have fixed interest rates and a defined repayment schedule. An open end equity loan is most often referred to as a secured line of credit. A secured line of credit is a much more flexible loan which allows the borrower to choose when and how often to borrow against the equity in the property. The lender will initially set an initial limit on the amount of money that can be borrowed under the line of credit and the interest rate will vary according to the market and the lender's prime lending rates. Because, equity loans will only be paid off after a first mortgage is satisfied, in the event of a default in payments, the interest rates they carry will most typically be several percentage points greater than those offered for first mortgages. Nonetheless, these rates are most often far better than the interest rates applicable to unsecured loans and credit cards.
When contemplating tapping into your home's equity, be aware that setting up a second mortgage or secured line of credit may involve some initial fees fees, which may include; appraisal fees, orginator fees, title fees, arrangement fees, closing and early pay off fees. Conveyand and surveyor costs, as well as, renewing title information fees may also be applicable, depending on how recently, or if, your home has been refinanced.
Who needs a rich uncle anyway? Many credit problems or cash flow needs can be satisfied by leveraging assets you have already accumulated in your home's value. Your financial advisor or an accredited and knowledgable Canadian mortgage broker can help you structure the home equity loan that fits your needs and circumstances, allowing you to enjoy life without resorting to costlier unsecured loans or credit cards to solve a financial problem.