Getting a Home Equity Loan (Refinance)

• You can borrow up to 90% of your home equity.
• Home equity loan works like regular mortgage - you get one big loan which must be repaid in 5 - 20 years.
• Home equity line of credit work like a credit card. You can take money at any time, and pay back whenever you want (except minimum payments).
• Home equity loan rates are higher than regular mortgages, but lower than credit cards, credit lines, auto loans and student loans
• Home equity loans are used for debt consolidation.
• Closing costs for home equity loans are similar to regular mortgages.
• Credit score directly affects interest rate. Higher score gives you lower interest rate and lower score gives higher interest rate.

Home Equity

Home Equity is value of your home, minus any money owed on it. For example, if your property is worth $200,000 with a $130,000 mortgage, then your home equity is $70,000.

To calculate your home equity - find out approximate value of your home, and then subtract your mortgage balance from that value.

To increase your home equity you must pay your mortgage. Every time you make a mortgage payment, you increase your home equity. Home equity can also grow if home prices rise. For example, if you own a home worth $200,000 with a $130,000 mortgage - your equity is $70,000. If in 5 years property value grows to $250,000, your home equity goes up with it. $250,000 - $130,000 = $120,000 (plus payments in 5 years)

• Second mortgage is another name for home equity loan. Both mean the same thing.

Home Equity Loan

Home equity loan is secured by your home and can be only as big as your equity. For example, if your house is worth $200,000 and there is a $120,000 mortgage on it, then your home equity is $80,000. You can borrow that $80,000 as a home equity loan and use it in any way desired. If you fail to pay back borrowed amount plus interest within agreed period of time (usually 10 - 25 years), lender has the right to take away your property.

• Home equity loan can only be as big as your equity.
• There's no downpayment.
• Borrowing limit is 90% of the home value.
• It takes 2 to 4 weeks to get home equity loan.
• Use home equity loan any way desired.

Home Equity Loan Payments

Once you get home equity loan, you must make regular monthly payments. Payments size depends on the sum you borrowed, interest rate and term length. The more you borrow, the more you have to pay each month + interest. The longer your term, the less you have to pay each month.

• Home equity loan payments are equal each month and cover both principal and interest.

Interest Rates For Home Equity Loans

Interest rates for home equity loans are higher than regular mortgages (5%-9%), but lower than credit cards (15% - 22%). Mortgage lenders do not post interest rates for home equity loans. To find out latest rates, you must apply for a home equity loan (no obligation).

• Home equity loan rates can be fixed or variable. (difference between fixed and variable rates)

Home Equity Line of Credit or HELOC

Home equity line of credit (HELOC) works like regular line of credit, but with one difference - It is secured by your home. If you fail to pay for it as agreed, lender will take away your property.

• Borrow as much as there is equity in your home.
• Think of home equity credit line as a regular credit card. You can borrow, pay back and borrow again.

If for example you borrow $50,000 and your home equity line is open for 15 years, you have 15 years to pay it back. If you choose to borrow and use the money without paying back for several years, you must make minimum interest payments (like credit cards).

• Lenders charge a "penalty" if don't use the credit line (small fee).
• Be careful if you have spending problems. Use Home equity credit line only for important payments.
• It's crucial to pay before home equity credit line closes, because otherwise lender has the right to take away the property.
• It takes 2 to 4 weeks to get home equity line of credit.

Interest Rates

Home equity credit line interest rates are higher than regular mortgage rates, but lower than credit cards. Lenders do not post their home equity credit line interest rates publicly. You have to apply for home equity line of credit to get interest rate quotes from lenders. Home equity credit line rates are variable, meaning rates may go up or down with the economy. (difference between fixed and variable rates)

Lender Can Reduce Your Credit Limit Line Any Time

Home equity line of credit is secured by the equity you own. If house value goes down, your home equity ownership goes down as well. To prevent borrowing more money that there is equity, lenders have the right to reduce credit limit.

For example:

$300,000 house with $120,000 first mortgage has $180,000 available home equity. Owner opens a home equity credit line for $180,000. Next year home value goes down to $250,000 and owner has less equity in the house. New equity is $250,000 - $120,000 = $130,000 To prevent borrowing more money than there is equity, lender has the right to reduce credit limit from $180,000 to $130,000 without any notice to the borrower.

• If home value goes down, so will the available credit.

If home value goes up lender will not increase the credit limit. You will need to refinance home equity line of credit.

Renewals

Once home equity credit line term ends, some lenders allow renewals. Renewal can prolong home equity credit line for 5 - 10 years.

For example, borrower had a line for 10 years. 10 years have passed and home equity line is about to close. If borrower has "renewal provision" in his contract, he can prolong home equity line of credit for another 5 - 10 years (depending on the agreement).

"Renewal provision" in a contract is required for renewal, and not all lenders have it. If you want this feature, ask lender or mortgage broker specifically for "HELOC renewal", and then request it in written form (to avoid nasty surprises).

Qualifying for Home Equity Loan or Home Equity Line Of Credit

Home equity loan qualification is similar to regular mortgage, but you need to own at least 5% home equity. Lenders will want to know how much you make and how long you've been at your job, as well as how long you have been working in your particular field. They will look at how much of your monthly income goes toward paying the mortgage, credit card bills, car payment and other obligations, including loan payments for which you are applying.

• Own at least 5% home equity.
• You must provide income proof and meet mortgage income qualifications.
• High credit score gets you low rate. Low credit score means high rate. See how credit score affects mortgage rates.
• You must live in your home.
• Provide documentation such as Social Insurance Number, mortgage insurance statement, income verification and more. View documents you need for home equity loan.

Home Equity Loan vs Home Equity Line of Credit

Home Equity Loan Closing Costs

Closing costs for home equity loan and for home equity line of credit are similar to regular mortgage, costing and average 2% - 4% of the loan amount. Some lenders offer "no cost" equity loans where all expenses are added on top of the loan.

Additional charges may apply depending on lender. Use above only as a guide. View more mortgage closing costs.

Important Notices About Home Equity Loans and Credit Lines

• It takes 2 to 4 weeks to obtain home equity credit line or a home equity loan.
• You can apply for home equity loan or credit line (HELOC) as soon as you own a portion of your home. Some people apply right after they buy a home.
• Interest paid on home equity loan may be tax deductible (contact government in your province http://canada.gc.ca/).

Negatives of Home Equity Loans and Home Equity Lines of Credit

Home equity loan and home equity credit line is secured by your property. If you fail to pay, lender will take away your property and sell it. Be very careful and calculate whether you can afford home equity loan + regular mortgage payment (if you have a mortgage on the property). Use home equity loan calculator to find out if you can afford it. It's easier to pay for home equity loan if you completely own your home, or own most of it.

Be careful not to take out most of your equity.

Documents You Need for Home Equity Loan or Home Equity Line of Credit

In addition to basic mortgage documentation you'll need:

• Copy of the document showing the most recent mortgage registered on the property.
• Copy of the latest insurance statement for the property.
• Copy of property ownership document (Land Title).
• Copy of the most recent mortgage statement. Copy should include name of the lender, mortgage reference number, approximate mortgage balance, current mortgage payment, status of tax account and mortgage renewal date. The existing lender's Annual Statement and/or the Mortgage Renewal Document is ideal for this purpose.

View all the documents you need for a mortgage loan.

Debt Consolidation with Home Equity

If you have several credit cards, car loans, student loans, retail cards and other debt that requires monthly payment - you can combine it into one loan with lower monthly charge.

For example:

Mortgage monthly payment is calculated using 8.5% interest rate over 15 year period (180 months). Credit card monthly payment figure represents first month minimum payment for $30,000 at 21% compound interest rate with 2,08% minimum monthly payment computation. Use credit card calculator and our mortgage calculator to do comparisons yourself.

By taking home equity loan for $30,000 to pay off debt monthly payment can be reduced by 46%.

Mortgage interest rates are subject to change without notice. We attempt to maintain accuracy on our website, however, mortgage information on this website should be used only as a guideline. Please consult a mortgage professional before taking any action.