For most people, a mortgage is the most important investment they will make in their lifetime, as it is a primary way to accumulate personal wealth. You can also build upon your personal wealth by using the equity that builds up in your home, the result of paying down the mortgage, combined with increasing home values.
WHAT IS EQUITY?
Equity is the difference between what you owe on your home’s mortgage and its value. For example, if your house is worth $300,000, and your mortgage is $100,000, you have $200,000 in equity. As you pay down your mortgage, your equity increases. If you have large projects that you want to undertake, such as house renovations or repairs, or you’re starting a business, you may want to consider a home equity mortgage. It has a much lower interest rate than credit cards, which carry an average 19% interest rate.
Such loans can be used not only for home repairs and renos but to consolidate loans, pay off high-interest debt like credit cards, or fund tuition. A consolidation loan combines your debts into one payment, which is a great way to deal with high-interest loans, or ones where you’re only managing to pay the interest and not the principal. These loans have a higher limit than credit cards, depending on the equity in your home.
There are two different kinds of loans that are based on residential equity. The first is a home equity loan. The other is a home equity line of credit (HELOC). Both come with a warning: since HELOCs and home equity loans use your residence as collateral, if you can’t make monthly payments due to illness or loss of work, you risk losing your home to foreclosure.
WHAT’S A HOME EQUITY LOAN?
This is when a borrower receives a lump sum up front. The loan has fixed interest rates and fixed payments. Often, they are referred to as second mortgages.
Borrowers have predictable monthly payments for the length of the equity loan since the interest rate is fixed.
An equity loan can be paid back over a period of up to 30 years.
If you need more money for an emergency, you will have to take out another loan.
If you want to pay a lower interest rate, you will have to refinance.
WHAT’S A HELOC?
This type of loan has a variable interest rate, and the payments are generally not fixed. Borrowers can tap into their equity as needed up to a pre-set credit limit, make payments, then take money out again.
Unlike a home mortgage, you only have to make regular payments against the interest owing on the HELOC. You don’t have to pay down the principal until you sell your home. But we do encourage our members to work on paying the principal down so that this debt doesn’t erode net worth in the long term.
This type of loan gives you the flexibility to borrow as much or as little as needed, depending on the equity available in your home..
Monthly payments fluctuate, which makes budgeting harder.
If interest rates rise — as they are doing — the variable interest rate may increase.
Some homeowners may be tempted to make impulse purchases up to the credit limit. Talk to a North Peace Savings & Credit Union Advisor, who will help you determine what kind of home equity loan is best suited to your individual circumstances and needs.
Shannon Luscombe is a Manager, Retail Advisory with North Peace Savings and Credit Union with a decade of experience working within the Credit Union system. She moved from Vancouver Island in 2019 to be with her husband who works in the Oil & Gas industry, bringing with her, Credit Union knowledge and experience to join the NPSCU team. She has a passion for helping Members succeed in achieving their financial goals, by sharing strategies and advice gained from a combination of education and experience in the financial industry.
Shannon says “the friendly people of Fort St John have made me feel right at home here and I am loving Northern life. I enjoy exploring the Peace region and all the beauty it has to offer with outdoor hiking, biking, and kayaking.”