Home equity loans are forms of mortgage financing that allow homeowners to borrow money using the value of their homes as collateral. You can use this money to pay for renovations, repairs, or other expenses related to your home.
The first step in calculating your home is subtracting the value of all outstanding debts from the current market value of your house. If this gives you a negative number, then no additional money is available after paying off all other debts, such as credit cards or mortgages.
Canadians use home equity in many ways, paying for living expenses like food, utilities, and rent. They also use it to purchase items that do not require paying interest, like cars or computers. As well, people use home equity to make significant purchases like second homes. Finally, Canadians can use their home equity to finance short-term loans for vehicle maintenance or emergency expenses such as medical bills.
What kinds of properties in Ontario can you buy with home equity?
Home equity loans can help you finance large, one-time purchases such as renovations or a second home that might otherwise be difficult to pay. Some properties that you can buy with home equity include:
- Vacation homes: If you have a home equity line of credit, you can buy a vacation home. You’ll be able to get a mortgage from a financial institution that holds your home equity line of credit. You can then use it to pay for buying and maintaining the vacation home you choose.
- Condos: Home equity can be a great way to buy a new condo. To do this, you need to access your home’s equity first. You can do this by taking out a second home mortgage or refinancing your current mortgage.
- Rentals: You can get a rental by taking out a home equity loan and paying it back with the rental income.
The Wrong Ways to Use Home Equity
You may be tempted to use your home equity to pay for vacation costs, daily expenses, or even credit card debt. Therefore, knowing better ways to use your home equity is essential. In addition, using your home equity for those items previously mentioned will reduce your home’s value and make it more challenging to sell in the future.
However, using home equity to pay off your credit card debt can pay back your debt faster. The interest rate on the debt can be less than what you would get with a standard credit card, which means more money in your pocket after you pay it off.
A drawback of using home equity to pay off credit card debt is that you need to pay off the debt quickly enough to avoid losing out on all your home equity.
The Advantages of Buying a Second Home With Home Equity
- Continually put your money to work: A home equity loan is an excellent way to diversify your property investment. It can also put your money to work by purchasing additional property as long as you can afford it.
- Lower costs for fees and closing: Using your home equity to purchase a second home can lower the costs associated with fees and closing.
- Purchasing a second property in unpredictable markets can be less hazardous: When you buy a second home in a down market, you can use the equity in your primary home to purchase the second property. This equity allows you to avoid selling your primary residence and pay capital gains tax on any profit you make from selling your prior home.
- An excellent financing option: The most significant benefit of using a home equity loan to purchase a second home is that it may be your best option for financing. By using your home as collateral and getting a mortgage on the property, you will be able to borrow a considerable percentage of the home’s value with no down payment. As a result, you can borrow as much money as necessary for whatever project or investment, including purchasing a second home.
The Disadvantages of Buying a Second Home With Home Equity
- Foreclosure risks: Your primary residence is in danger of foreclosure because it is being used as collateral. If you don’t repay the loan, then your house could be repossessed.
- High interest rates: Interest rates can vary by lender and period, making finding the best deal for your needs challenging, especially if you need quick cash. High-interest rates are associated with home equity loans. Consequently, the interest and fees on the loan will be higher than what you borrowed.
- You can lose both homes: The biggest drawback of using home equity to purchase a second property is that if your payments are inconsistent, you risk losing the new property and your primary residence.
Understanding Home Equity
In sum, home equity is the portion of a borrower’s home, usually in the form of a loan, that they own after paying off their mortgage.
Home equity can purchase or refinance another property, invest in stocks and bonds, and cover unanticipated expenses such as medical bills. However, due to the risks discussed above, it is essential to understand exactly how home equity works before using it as a means of buying another property.
Author:
Jessica Coates is a blogger in Toronto. She graduated with honors from the University of British Columbia with a dual degree in Business Administration and Creative Writing. Jessica Coates is a community manager for small businesses across Canada. When not working, she leisurely studies economics, history, law and business solutions.
I liked that you said that you can lower the costs associated with fees and closing when you use your home equity to purchase a second home. This is something that I will share with my parents so they can consider the benefits of using their 10-year home equity credit to finally be able to purchase the property that they have been interested in since April. We will meet later this afternoon for a snack date, so I will definitely share your blog with them.