If you are in need of a little extra money, whether you’re finding difficulty making ends meet or you want to take a vacation or remodel your home, a home equity loan may be a good option for you.
What is a home equity loan?
There are two types of home equity loans: a home equity line of credit and a home equity loan. Both are considered second mortgages that allow you to borrow money from the equity that has accumulated on your home. With a home equity line of credit, you use the equity in your home the same way you would a credit card. The balance is revolving, meaning you can make payments on your line of credit plus interest and continue to use it.
With a home equity loan, you are given a pre-approved amount of money in a lump sum, which you then make payments on. Whether you opt for a loan or line of credit, you must still meet the lender’s approval.
Is a home equity loan right for me?
Before you decide whether a home equity loan is right for you or not, it’s important to weigh the pros and cons. Advantages of a home equity loan or line of credit include:
You can use the money for whatever you want.
The money you receive from your home equity loan can be used for whatever you’d like, from making home improvements to paying down debt to paying cash for a new car.
Interest rates are lower than credit cards
The average rate for a home equity loan or line of credit right now is a little over 4%, while the average rate for a credit card is just over 11%. With a home equity loan, you save more money in interest.
Potential drawbacks to a home equity loan include:
Home equity loans are risky
Because a home equity loan is considered a second mortgage, if you can’t make the payments on your home equity loan, you are putting your home at risk for foreclosure.
Equity is not always dependable
In the event the equity in your home drops, if you go to sell your home, you may not be able to repay your home equity loan with actual equity. Instead, you must repay the loan yourself. Chances are, if you’ve taken out a home equity loan in the first place, you probably don’t have the cash to repay your loan sitting around.
As a general rule, home equity loans are a good idea for those who already have a significant amount of equity in their homes and are using their loan for a large, one-time purchase. On the other hand, if you are using a home equity loan as a way to live beyond your means, you may want to reconsider.
How do I apply for a home equity loan?
If a home equity loan sounds like something you are interested in, your Calgary mortgage broker can provide you with the paperwork and information you need to apply for your home equity
