How Is The Question, Why Is The Answer

Also known as a second mortgage, a home equity loan Canada allows homeowners to borrow money by pledging equity in their house. In 1996 home equity loans exploded in popularity because they provided a way for consumers to bypass 96’s tax changes which eliminated deductions to the interest on multiple consumer purchases. Having a home equity loan will allow you to borrow up to $100,000 and still deduct all of the interest when you file your taxes.

Below you will find how these loans work and how they will benefit you along with the pitfalls of home equity loans:

Types Of Home Equity Loans

A home equity loan comes in two types: Fixed-Rate Loans and Lines Of Credit – They both can be available in terms and range from five to fifteen years. They also must be repaid in full if the home that was borrowed was sold.

1. Fixed-Rate Loans

They provide one payment to the borrower which has to be repaid over a period of time at an agreed interest rate. The payment and interest rate will remain the same over the lifetime of the loan.

2. Home-Equity Lines Of Credit

It is a variable-rate loan that works very similar to a credit card and even sometimes comes with one. The borrower will be pre-approved for a certain spending limit and can withdraw money when they need to via credit card or cheque. The monthly payments vary on the amount of money borrowed and the interest rate. Similar to Fixed-Rate Loans, the Home-Equity Lines Of Credit has a set term – At the end of the term, the outstanding loan amount must be repaid in full.

Benefits For You

Home equity loans provide an easy source for cash. The interest rate is higher than the first mortgage, but is a lot lower on credit cards and other consumer loans. The number one reason homeowners borrow against the value of their home is to pay off credit card balances. The interest paid on the loan is tax deductible. So that means you will get a single payment, a lower interest rate and tax benefits.

Benefits For Lenders

Home equity loans are a lenders best friend because they earn even more interest and fees on the consumer’s mortgage. If the borrower were to default on a payment, the lender gets to keep all of the money earned on the initial mortgage and the home equity loan along with repossessing the property, selling it and restarting the cycle with the next borrower.

The Right Way To Use A Home-Equity Loan

If you are a responsible homeowner, then a home equity loan can be an extremely valuable tool – If you have a steady, reliable source of income and know that you can repay the loan, the low interest rates and tax deductibility makes sense to use. Fixed-Rate Home Equity Loans can help you cover costs of home renovations, medical bills where as the Home Equity Line Of Credit can cover recurring costs such as tuition for a 4 year degree of college.

Realizing The Downfalls

The main issue with home equity loan Canada is that it seems to be an easy solution for a borrower who may have fallen into a cycle of spending, borrowing, spending and sinking even deeper into debt. Unfortunately, this is a common issue that the lenders have a term for it: reloading which is basically a habit of taking a loan in order to pay off existing debts and free up your debts which the borrower uses to make additional purchases.

Should You Tap Your Home’s Equity?

Well, nothing is more important in life than food, clothing and shelter and only shelter can be leveraged for cash. Regardless of the risk involved, it is easy to be tempted in using a home equity loan to splurge on expensive luxuries. In order to avoid the downfalls of reloading, be sure to review your financial situation before you borrow against your home. Be sure to understand all the terms and have the means to make the payments without compromising other bills and being comfortable repaying the debt before the due date.