Obtaining a home equity loan sounds incredibly alluring. After all, they’re often advertised as being no-hassle and fairly quick, even if your credit is poor or you’ve been turned down by banking institutions in the past. Home equity loans enable individuals and families to access some pretty hefty sums of money that make all kinds of things possible – from home renovations to lavish vacations. This all sounds great, doesn’t it? But it’s not as simple as taking money out from the accrued value of your payments toward your home. The process is a bit more complicated and comes with some perceived downsides that you should be aware of.
What is a Home Equity Loan, Exactly?
There are two types of home equity loans:
- Fixed-term equity loans
- Home equity lines of credit, otherwise known as HELOC
Both allow individuals and families to take out funds by leveraging the equity of their homes. The two loan types operate in drastically different ways.
A fixed-term loan allows you to take out a large, lump sum all at once. This is a great option for those who wish to spend a significant portion on a one-time expenditure such as paying college tuition or going on a family trip. These loans have a fixed interest rate as a part of the repayment plan, which usually spans between 5 and 15 years. More details can be found at https://askross.ca/second-mortgages-toronto-and-gta/
Home Equity Lines of Credit (HELOC)
A HELOC arrangement works more like a credit card than a lump-sum loan. There is a minimal down payment and an adjustable interest rate to be repaid. The funds may be withdrawn as needed, rather than dispensed all at once. Many people looking to sell their homes will use their HELOC as a means of funding home renovations – which may help them sell their home at a much higher value, thus recouping the cost of the HELOC.
There are downsides and upsides to each option, as you could likely imagine from the brief descriptions above. The truth about both forms of home equity access is that you get money that you’re borrowing against your terms to use for whatever you’d like.
While it may be incredibly appealing to jump on the chance to use your home’s equity at the first given opportunity, we don’t advise this. Accessing home equity is still a debt that must be repaid, no matter the form of loan you choose. Make sure that you can balance your fixed-term loan or HELOC alongside your other monthly payments before taking the plunge.