Home
Equity Explained
For the vast majority of us, buying a home is the single
biggest investment we make in our lifetime. Property is one
of the safest investments you can make. Over time, you will
find that the value of your investment has increased significantly
thereby giving you a profit on your initial investment.
If you choose not to sell your home, this increase in profit
is sitting in the bricks and mortar of your home. A home equity
loan allows you to borrow against this increase in profit
– your equity in your home. You can release this equity and
pay for home improvements, college education or look at other
investment opportunities.
So, what is a home equity loan? Quite simply, it is a loan
based on the amount of equity tied up in the value of your
home. There are two ways to release this equity – a traditional
home equity loan and a home equity line of credit loan. As
a rule, a home equity loan is based on a percentage of you’re
the value of your home minus any outstanding balance. Let’s
say, your home is valued at $200,000, then 80% of that is
$160,000. And you have an outstanding mortgage of $120,000,
then you would have equity of $40,000. The lender would then
loan you a lump sum based on this figure.
A home equity line of credit is where a lender will issue
you with a credit card or cheque book and your credit limit
is based on the amount of equity you have. The advantage of
this type of loan is that you only start paying interest when
you start drawing funds. This type of loan is usually split
into a draw period and a repayment period. The draw period
is usually between 5 and 10 years and you can take out any
part of the funds during this period. Any payments you make
in this period goes straight back as your credit line. The
rates of your home equity loan are variable and usually a
few points above prime. In most cases, interest payments are
tax deductible.
Home equity loans are a great way to release extra cash which
is tied up in your home but borrowers must be fully aware
that they are using their home as collateral so if interest
payments are not met, they could lose their home. |
