When people talk about a home mortgage, they usually refer to a conventional mortgage which allows them to borrow money from a bank or financial institution to purchase a property. When you apply for a home equity mortgage, you will be able to borrow a fixed lump sum of money using your home as collateral. You will be able to repay the home equity mortgage at a fixed interest rate over a period of time that you and your lender decide beforehand. One of the ways you can apply for a home equity mortgage is by leveraging the equity value of your home and to grow your home equity, you will need to pay your mortgage.
You can calculate the home equity by determining the difference between your home value and mortgages. Then, when you pay your mortgage regularly, you will increase your equity, and you can use the loan for your home improvement projects. With home equity, you can borrow up to 85% of your home’s value, and you can pay it back with interest of a fixed rate or a variable rate, depending on what you agreed upon with your lenders.
The interest you pay on your home equity mortgage is tax-deductible if you can prove that you have used the money to buy or build a home or improve your current residence. Even though the home equity mortgage varies from lender to lender, here is what you will need to get your approved:
● At least 15% to 20% of home equity to get your mortgage approved
● The higher the credit score, with a minimum of 620, the better chance you have of approval
● It would be best if you had no more than a 43% debt-to-income ratio.
Is a home equity mortgage a good idea?
Like any other loans you take, when you decide to take out a home equity mortgage, determining whether it is a good idea depends on your financial situation. Even though using your home as collateral has its risks, it allows you to borrow a good amount of money that you can use to improve your home. In addition, many people prefer to go for home equity because with the fixed-rate interest; they know what amount they will be paying every month, making it easier for them to create their budgets around it.
A home equity mortgage often offers a lower interest rate than a personal loan or credit card, so with this, you will be able to save money. In addition, if you use the mortgage money for home improvement projects, you will find that the interest is tax-deductible in such cases.
Increasing your home equity
If you are planning to apply for a home equity mortgage, one thing that you must have a good equity value on your home, which is why it is essential to know how you can increase your home equity:
1. Mortgage payment: When you pay your mortgage regularly, you will decrease your mortgage balance and increase your home equity each month. The mortgage payment is one of the easiest ways to build your home equity, and you can make the process faster by making additional mortgage principal payments every month. The more your home equity is, the better value you get on your home.
2. Home improvements: Making home improvements increase your property value tremendously, which is extremely helpful when you apply for a home equity mortgage. With an improved home, even when your mortgage principal balance remains the same, the increasing value of your home helps you increase the home equity. However, before starting a renovation project, if you are planning to do it solely to increase home equity, you should research what type of renovations increase the value.
3. Down payment: Making a large down payment is another way to increase your home’s equity. The more your down payment is, the faster you can tap into your home’s equity, as most lenders require you to have 20 percent equity in your home. So more down-payment allows you to increase your home equity, making it possible for you to have a good deal on your mortgage.
Types of home equity mortgage that you can consider
Depending on how you decide to repay the loans, you can choose from the home equity mortgage that is available in Canada:
1. Fixed-rate loan: As the name suggests, once you secure a fixed-rate loan, you should start paying a fixed interest rate for a predetermined period of time. No matter the market condition, the interest rate in this type of mortgage never fluctuates, allowing you to budget your money accordingly.
2. Home equity lines of credit (HELOCs): When you apply for HELOC, you have the flexibility to withdraw as much amount as you like upto the credit limit within an initial draw period as set by the lender. Lenders will pre-approve a certain spending amount, and as a borrower, you will be able to use that money whenever you need it using a credit card or checks. You will be able to repay the amount monthly depending on how much you borrowed and its interest.
Finding the best home equity mortgage in Canada will require you to do an insane amount of research if you want to get the best deal. However, platforms like Best Mortgage Online are helpful in such cases where you are unable to find the ideal lenders on your own. With such platforms, you will be able to compare different lenders and choose the one that best fits your requirements.