Knowing you can tap into your home’s equity when in need of money can be a great relief. But although home equity loans are a powerful money tool for getting out of a tight financial situation or for financing urgent needs, there are also many ways you can misuse the money. As with any loan, whenever you are using your home as a collateral, you face the potential risk of losing your property by being unable to repay your debt.
When borrowing against your home’s equity you have two options: either to get a home equity loan, or a home equity line of credit (HELOC). The main difference between the two is that home equity lines of credit work similarly to credit cards. You can use the potential funds however you wish, by paying a variable monthly interest rate.
With a home equity loan you will receive all the money in a single lump sum, which offers you the flexibility to cover bigger expenses. With most equity loans, the minimum monthly payments will cover interest during the draw period, leaving the principal for when the repayment time comes.
And if you are wondering where you can get a home equity loan from in BC Canada, banks, credit unions, or mortgage brokers are all offering a large variety of home equity loan products.
Taking a home equity loan from banks or credit unions works best if you are a responsible borrower with a steady income and a good credit score. For all the other potential borrowers who don’t fit into these strict criterias, working with a reputable mortgage broker in Vancouver might be the right choice to make.
And although home equity loans have become extremely popular lately as means of financing large expenses, being smart about the way you spend the loan money is a must. Join us today as we discuss how to use your home equity wisely, and what are the risks you might get yourself exposed to if you enter a loan contract without fully understanding the repercussions:
1. Don’t Use The Home Equity Loan On Meaningless Stuff
Although great for helping you to get out of a tough financial situation, a home equity loan will also cost you money. It’s true that some lenders might offer you better deals than others but in the end you will still need to pay interest and fees.
That’s why you should not take out a loan for unnecessary things like taking a holiday or buying meaningless objects. And more importantly, don’t borrow more than you are comfortable to pay back each month.
Try and invest the money into something that will boost your home’s value like major home improvements or buying a rental property. Also, it’s very important to keep in mind that if you use your home equity loan for anything other that house related, you will not be able to take a write-off on your taxes.
2. Be Careful When Taking The Loan
Whenever you decide to borrow against your home you should always be careful. As we explained earlier, you don’t want to end up in the dreaded scenario where you are unable to repay the loan and the lender takes your home away. Also, simply because you can borrow a big amount doesn’t mean you should also do it!
Banks can present you their offers in shiny colors but knowing your costs and minding your spending should be also considered. Don’t tap into your emergency funds and make sure to always have enough cash at disposal to pay the monthly installments if something unexpected appears.
A private mortgage broker can help you navigate the grey areas of home equity loans, and advise you what private mortgage lender to go with if you don’t qualify with banks, and also what home equity loan product would better suit your lifestyle and needs.
3. Don’t Tap Into Your Home’s Equity If You Plan To Sell The Property Soon
The repayment time of home equity loans range anywhere in between 5-30 years, with HELOCs generally allowing up to 10 years to withdraw funds, and 20 years to repay.
But if in the meantime, before your loan reaches maturity, you decide to sell your home, you will need to be up to date with all your debts. Although in an ideal situation you should be able to sell your property at a price good enough to cover the rest of your loan, things might not always happen as planned.
The bottom line is that home equity loans are a perfect financial tool for many people especially for those who don’t have too much income, and who wish to get a loan with lower interest rates.