Your home’s more than just a house. It’s a realization of your dreams. It’s a shelter that’ll protect you and your loved ones for years to come and it can be a source of financial security.
Perhaps you require funds for consolidating high-interest debts, paying off your car loan, a home improvement, an unexpected repair or even an emergency. If you need funds that aren’t readily available to you at the moment, leveraging your home’s equity might just be the solution.
What’s Home Equity?
Home equity’s simply the difference between the value of your home and how much you currently owe on your mortgage. For instance, if your home is worth $450,000 and you owe $150,000 on your mortgage, your home equity is $300,000. Your home equity can increase as you pay down your mortgage and if the value of your home increases.
You may borrow funds secured against your home with interest rates usually being lower than the other types of loans. For Canadian homeowners, they can usually borrow up to 80% of their home’s appraised value.
6 Wise Ways to Use Your Home Equity
There are no limits when it comes to deciding how to use your home equity, but there are some savvy ways you can maximize your line of credit.
1. Home renovations
Home improvements are the most common and most likely the safest reason to tap into your home equity. Besides customizing your home to your needs and liking, this can also add value to your home, which could be beneficial if you decide to sell.
2. Acquiring a second property
If you’re considering acquiring a second property, a cottage or a rental property perhaps, your home equity can help with the down payment and legal fees.
When using your home equity for a down payment,you may have more flexibility with the terms and conditions of the loan, such as the duration and interest payments only. However, be aware that this loan’s secured against your property – defaulting or missing payments could result in extra fees, penalties and harming your credit report.
3. Lump-sum expenses
A home equity loan or a HELOC could be a good way to fund large, lump-sum expenses. Some common uses are for weddings, education, investments and gifting.
With a home equity loan or a HELOC, the interest charges are usually lower than a private loan or credit cards.
4. Business expenses
Business requires capital. Some business owners tap into their home equity to acquire new businesses and to grow their existing businesses, instead of opting for a business loan. A business owner might choose to do this as business loans are usually more tedious and stringent.
5. Pay off loans
A HELOC or a home equity loan can be used to consolidate debt at a lower rate, allowing for more manageable monthly payments. Many homeowners usually use the equity of their home to pay off their personal debts, such as car loans, credit card loans or tax arrears.
6. Emergency expenses
Next to budgeting, having an emergency fund’s probably the most crucial in securing your finances. Most financial experts advise having an emergency fund that covers 3 to 6 months worth of expenses. While this is the ideal way to be prepared for the unexpected, it’s simply not the reality for all Canadians, with 37% of the population saying that they rarely save for emergencies.
In this case, knowing that you can access your home equity in the event of an emergency can bring peace of mind and a sense of comfort.
Is Using Your Home Equity the Right Choice?
Perhaps you’ve worked hard to pay off your mortgage earlier than originally planned or perhaps you’ve managed to increase the value of your home over the years. These situations mean you’ve been able to grow the equity in your home.
But even if you’re in a good position to tap into it, keep in mind that when it comes to home equity, you shouldn’t borrow more than what you need, shouldn’t overspend and put your home at risk over frivolous spending.
It’s important to plan ahead before choosing to use your home equity. Be sure your finances are strong as you’ll have to maintain your monthly payments.
Based just outside the Greater Toronto Area, Daisy Raouph is a mortgage broker and financial security advisor equipped with over 30 years of experience in mortgage and financial services. Consult Daisy today to formulate a plan based on your individual needs.