How Does Home Equity Work

You’ve probably heard the term home equity or home equity line of credit, but what does it actually it mean?

Investopedia describes home equity as, “the value of ownership built up in a home or property that represents the current market value of the house less any remaining mortgage payments. This value is built up over time. As the property owner pays off the mortgage and the market value of the property appreciates.”

Now that you know home equity is the value your house has acquired since purchase a home equity line of credit (HELOC) is a line of credit that can be borrowed against your house.

Analysis of Home Equity:




How do they work:

The home equity line of credit money can be plentiful, relatively easy to get, and hard to resist. A home equity line of credit can help improve your living circumstances and possibly lead to financial gain.

You have to apply with a lender to find out whether you qualify.

Government rules limit the maximum amount of money available to 65% of a home’s appraised value. However, a home equity line of credit can be combined with a regular mortgage for a maximum of 80 per cent of a home’s appraised value.

Like credit cards, you make minimum monthly payments on the amount borrowed and you do not have to pay off the full balance each month.

Advantages:

  • Easy, accessible cash at a very cheap price
  • Banks make this an easy process for homeowners
  • The flexibility for cash flow is great
  • Pay as much as you want when you want
  • HELOC are typically low interest debt so you can improve your home, pay for school, make an investment and be farther ahead.

Disadvantages

  • Because it’s variable pricing banks can alter terms when they want
  • Your borrowing power could be cut in half at anytime if the banks decide to change their terms and interest rates
  • HELOC are one of the fastest growing debts currently occurring in Canada
  • If you continuously take money from your HELOC and are not paying down you could wind up not making money on your home when you sell it
  • If you borrow more than you can afford and you are unable to repay the amounts you have borrowed plus your interest – you could lose your home

Final Thoughts

We all need extra money at some point in our life and the main reason for a HELOC is to get the money you need, use it, and pay it off. This type of planning and forecasting involves a very specific purpose over a defined time.

Be sure what you are taking the money for is actually something you “need”. Seperate this from your wants. The more money you owe, the less options and less flexibility you have. The more money you borrow also leaves you more cash strapped.

Don’t assume your life will always remain this way. You could lose your job. You or your spouse could become sick. Real estate prices may fall and interest rates may go up. Plan for these unfortunate life circumstances as life has a way of changing unexpectedly.
If you need help buying or selling your home please contact us at any time.