A home equity loan, known as second mortgage and equity loan, is a consumer loan in which borrowers use their home’s equity to borrow funds. The equity essentially serves as collateral, and the loan amount is determined by the difference between the property’s current market value and the borrower’s equity. The loan creates a lien against the property, thus reducing the home equity. Home equity loans are often used to pay for home repairs, college education, or medical bills, and to finance major expenses.
Basically, a home equity loan represents a secured credit line. When the borrower draws down on the line of credit, the loan provider places a second mortgage on the property until the balance is repaid. Then the line of credit can be used for other purchases. If the borrower is unable to pay off the balance, the financial institution can sell the property to recover its money.
Home equity loans are usually offered with adjustable interest rates, and the rate is lower than that on credit cards or second mortgages. The variable rate offered is based on some publicly available index. In addition, variable rate loans have a cap or ceiling on how much the interest rate can increase throughout the repayment period. Then, some Canadian financial institutions allow borrowers to convert their home equity loan to a fixed rate loan. Borrowers may choose to convert the full amount or a part of it into an installment loan with a fixed term.
Financial institutions that offer home equity loans usually require a good loan-to-value ratio and an excellent or very good credit history. There are two main types of home equity loans on the market – open endHELOC and closed endHET. Both types require the provision of collateral, like a standard mortgage, and work like a second mortgage. Most financial institutions in Canada offer home equity loans with shorter terms compared to first mortgages. Depending on the financial institution, the term varies from 1 to 35 years.
Borrowers can take a home equity loan in place of a standard mortgage, but they usually cannot buy a house using the money. The funds can only be used to refinance. Note that a number of fees are associated with taking out a home equity loan, including title fees, closing fees, arrangement fees, and stamp duties. Other fees may apply as well, such as early pay-off fees and originator and appraisal fees. The application fee is not refundable if the borrower is turned down for credit. Closing costs include taxes, title insurance, mortgage preparation and filling, fees for attorneys, and others. A property appraisal fee is also paid to make an estimate of the value of the borrower’s home.
Finally, before taking a home equity loan, it is a good idea to think of how the money will be repaid. Some home equity loan plans specify a minimum monthly payment to cover the amount borrowed plus accrued interest. However, the situation is different from standard loan agreements. The amount that is paid toward the principal might not be sufficient to pay off the loan at the end of the term. Some financial institutions in Canada allow interest-only payments throughout the term of the loan. In this case, borrowers do not make payments toward the principal. Borrowers who take a home equity loan in the amount of $15,000, for instance, will owe this amount once the term is over. Regardless of the minimum payment required by the bank, borrowers often choose to pay more, and many financial institutions offer a variety of payment options. Many borrowers make payments toward the principal on a regular basis much like they do for other loans. For instance, borrowers who take a home equity loan to buy a boat may make payments as they would on a standard boat loan. Whatever the payment arrangement is – paying none, a little, or some of the principal – the borrower has to pay off the balance in full once the plan ends. This means making a balloon payment by using one’s savings, borrowing from another financial institution, refinancing with the same lender, or by other means. Borrowers who are unable to pay off the balance risk losing their home.
Borrowers who sell the property used as collateral may be required to repay the home equity loan immediately and in full. Those who consider selling their home at some point in time in the near future may think of the upfront costs involved in repaying the loan. In addition, the terms of the loan agreement my prohibit renting the property used as collateral.
A number of Canadian financial institutions offer home equity loans, including TD Bank, BMO, and others. Clients of the Bank of Montreal who take a home equity loan use their home as collateral. They can use the money for their renovation needs for an investment property, go on vacation, or make major purchases. Borrowers who opt for a BMO home equity loan enjoy flexible repayment schedules and fixed interest rates. They are allowed to defer two monthly payments twice a year. Clients of the bank can take optional BMO disability insurance or buy creditor life insurance. TD Bank also offers home equity loans to its customers. TD home equity loans are featured with fixed monthly payments and a fixed interest rate. Borrowers can opt for payment protection, which allows them to cancel their payments under certain circumstances such as unforeseen loss of income. The home equity loans offered by TD bank can be used for bill consolidation, major purchases, educational expenses, home improvement, to refinance an existing mortgage, and more. Tax deduction of interest is possible, and home ownership is required to obtain a home equity loan. Generally, home equity loans are offered to customers who want a loan with a fixed interest rate and stable monthly payments, which can be paid at a time of the borrower’s choice. Borrowers receive the money in one lump sum.
RBC Royal Bank also offers home equity loans through its branches in Toronto, offices in Halifax, branches in Vancouver, and elsewhere. RBC home equity loans are designed for borrowers who own a home. They can use their home equity as a cost-effective way to finance major purchases or home improvement projects. Home equity loans are featured with lower interest rates than other financial products. Under the low interest rate offered, borrowers may choose to consolidate their loans, go on vacation, buy a new car, or pay their child’s education.
Home equity lines of credit are extended to Canadian homeowners who agree to use some property as collateral. Borrowers are allowed to draw on the credit line once a maximum balance has been established for them. Home equity lines of credit or HELOCs are offered with a variable interest rate tied to the prime rate. Borrowers have to make interest payments on a monthly basis, and the term is usually between 5 and 20 years. Once the term is over, the loan balance has to be paid off in full.
How does a HELOC work? Borrowers who take a standard mortgage have to repay it in full at closing. Using a home equity line of credit, borrowers receive the creditor’s promise to advance funds up to a certain amount. Clients can choose the amount of money to draw and can do so at a time of their choosing. Borrowers can draw on a HELOC by using a special type of credit card, by writing a check, or in other ways.
Different factors have resulted in an increased demand for home equity lines of credit. Retail sales channels have grown in number, with HELOCs mainly offered by local financial institutions. Moderate inflation and low interest rates, coupled with rising home values also contribute to this trend. Home equity lines of credit have become an attractive borrowing method because interest is tax-deductible in many cases. HELOCs also offer certain advantages to borrowers, one being the relatively low interest rate. Reputable loan providers do not have check-writing or account maintenance fees. Borrowers who have a good credit score would not pay appraisal costs, closing costs, or an application fee. Another advantage is that borrowers can pay off the balance whenever they choose to. It is advisable to discuss this with a loan officer to make sure there are no early prepayment fees.
Canadian borrowers who opt for a HELOC should hold a 20 percent home equity at a minimum. This requirement is in place to ensure that lenders’ interests are sufficiently safeguarded. Borrowers benefit from this as well, because the more home equity they have, the lower the interest rate. The minimum equity requirement is generally accepted, although it varies from one loan provider to another.
A number of financial institutions in Canada feature home equity lines of credit, including the big banks. The Canadian Imperial Bank of Commerce offers this type of financing through its Toronto branches, Ottawa branches, Vancouver offices, and so on. CIBC home equity lines of credit are advertised as giving clients convenient and flexible access to money, which can be used to make investments and major purchases, renovate one’s home, and even invest in a residential property. Clients of the bank are offered a lower rate of interest and a higher credit limit depending on their circumstances. Interest is due only on the amount of money used, and clients are not required to pay service fees or associated administration fees. Clients of CIBC apply only once and are allowed to draw on the line of credit repeatedly. They can pay via ATMs, EFT, by mail, in-branch deposit, and through online and telephone banking. BMO also offers BMO home equity lines of credit, which can be used for extensive renovation and home improvement projects, for big purchases, etc. Borrowers can draw on the line of credit up to their available limit and are offered a variable interest rate. Funds can be accessed through telephone and online banking, ATMs, and line of credit checks. Some customers are offered interest-only payments. Clients can choose from disability plus job loss and creditor life insurance, and these are optional. Applications for home equity lines of credit are normally processed within two working days. Applicants are asked to present their pretax monthly income and expenses, information on their debts and the value of investment properties, investments, savings, etc.
Clients of RBC Royal Bank may want to look into the RBC home equity line of credit offered by the bank. RBC offers secured lines of credit, with funds to be used for making investments, home renovations, paying everyday expenses, paying off high interest debts, etc. Clients can use their guaranteed investments or home equity to obtain a low rate of interest and a higher credit limit. HELOCs are offered with competitive interest rates (the bank offers unsecured lines of credit as well, but interest rates are based on one’s credit standing). Clients of the bank are allowed to borrow instantly and at a time of their choosing. They can use online and telephone banking and transfer and withdraw funds at ATMs. The bank offers detailed monthly statements that specify the amount due each month, helping clients keep track of their expenses. Borrowers do not have to reapply every time they want to draw on their home equity line of credit. Another option for a HELOC is the home equity line of credit offered by the Bank of Nova Scotia. It gives borrowers extra buying power, allowing them to invest in major purchases and renovations, to meet their household expenses, and more. The equity plan offered by the bank can be used to pay one’s credit cards, other lines of credit, mortgage loans, and loans. The home equity line of credit offered by Scotiabank is a good way to reduce one’s borrowing costs. Borrowers can split their loan into several parts to lower interest rate risk and can make interest-only payments.
Finally, TD Bank is a good place to look for a home equity line of credit for those who are clients of the bank. Borrowers who take a HELOC borrow money by using their home equity. They pay as much as they want and can make interest-only payments. Clients who choose a fixed interest line of credit may be eligible for cash rebates for solar panel purchases and other green purchases.
Home equity mortgage loans are loans used to gain quick access to funds or to consolidate debts. Home equity mortgages are a good solution for borrowers who look into bill consolidation or want to finance their home improvement projects. This financial product is a combination of a line of credit and a fixed rate mortgage. By paying down their mortgage, borrowers have more funds available to consolidate debt, buy a vacation property, renovate their home, or make investments. In other words, as the borrower builds equity, the lender increases the line of credit. Canadian borrowers can choose from different payment frequencies (monthly, semi-monthly, or bi-weekly) to suit their cash flow. They are allowed to prepay a certain amount of the principal annually. Mortgage payments cover the interest charges and the principal amount, but borrowers can make interest-only payments on the amount used on their credit line. Credit lines are available at preferred rates, and the mortgage interest rate is locked in throughout the mortgage term. Some financial institutions in Canada offer insurance to cover unexpected job loss, disability, critical illness, possessions, and the borrower’s home. Some loan providers also allow borrowers to transfer their terms upon selling the property.
Bad credit home equity loans are offered to persons who have declared bankruptcy, filed a consumer proposal, and have credit problems in general. These loans are also called home equity cash loans and are advertised as a way of rebuilding credit. The money given in the form of a bad credit home equity loan can be used to meet upcoming holiday expenses, pay bills or pay off high-interest debts. Canadian borrowers who take a bad credit home equity loan can choose from either fixed or adjustable interest rate. Fixed interest rate loans are offered with a higher interest rate than variable rate loans. Some financial institutions also charge minimum balance fees and early prepayment fees. Different lenders will offer different terms, including refinancing possibilities, interest rate charges, and repayment schedules.
Naturally, the highest credit limits and lowest interest rates are reserved for borrowers with a high credit score. Persons with poor credit who get a bad credit home equity loan may end up paying a lot of money in interest charges. This serves to reduce the lender’s risk in case the borrower fails to keep up with payments.
Whether borrowers take a home equity loan or a bad credit home equity loan, lenders are required to disclose the cost of borrowing and all important terms, including the payment terms, miscellaneous charges, the APR, as well as information about different variable-rate features, if any. Canadian financial institutions cannot charge fees until borrowers have been informed of the terms and conditions.