If you’re a homeowner, you may be considering taking out a loan using your home equity. But what exactly is home equity, and what are the different types of loans you can take out against it?
In this article, we’ll break down everything you need to know about a home equity loan and a home equity line of credit, including how they work and how much you can borrow.
What Is a Home Equity Loan?
A home equity loan is a loan in which you use your home equity as collateral. This means that if you default on the loan, the lender can foreclose on your home.
Home equity loans are typically fixed-rate loans, meaning the interest rate stays the same for the life of the loan. They are also usually for a shorter term than a traditional mortgage, lasting anywhere from 5 to 15 years.
Because your home secures home equity loans, they usually have lower interest rates than unsecured loans. And because they have shorter terms, they also have lower total interest costs over the life of the loan.
How Much Can You Borrow in a Home Equity Loan?
The amount you can borrow in a home equity loan depends on how much equity you have in your home. As we mentioned, you can usually borrow up to 80% of your home equity. So if your home is worth $300,000 and you have $200,000 left to pay on your mortgage, you could potentially borrow $80,000.
Of course, the amount you end up borrowing will also depend on your credit score and income. Lenders will want to make sure you can afford the loan payments, so they may require a higher income if you have a lower credit score.
What Is a Home Equity Line of Credit Loan?
A home equity line of credit (HELOC) is a revolving line of credit that you can draw from as needed. HELOCs typically have a lower interest rate than home equity loans, but they also have a variable interest rate that can increase over time. The repayment terms generally are shorter, ranging from five to 10 years.
One of the most significant advantages of a HELOC is that you only pay interest on the amount of money you actually borrow. So, if you only need to borrow a small amount, you won’t end up paying interest on the entire line of credit.
However, because the interest rate is variable, it’s important to know that your monthly payments could increase over time. Additionally, if you don’t repay the loan within the specified time frame, you may be required to pay back the entire loan all at once, which could be difficult.
How Much Can You Borrow in a Home Equity Line of Credit Loan?
The amount you can borrow in a home equity line of credit loan depends on a few factors, including the value of your home and your outstanding mortgage balance.
Typically, you can borrow up to 85% of the value of your home, minus any outstanding mortgage balance. So, if your home is worth $200,000 and you have an outstanding mortgage balance of $100,000, you could potentially borrow up to $85,000 through a HELOC.
Both home equity loans and home equity lines of credit can be a great way to access the equity in your home. Your best option will depend on your specific needs and financial situation. Be sure to speak with a financial advisor to get more information and to see which option is right for you.
If you want to apply for a home equity loan in Ottawa, don’t hesitate to contact us at Ottawa Mortgage Services. We provide mortgage services for first-time home buyers, self-employed people, and commercial clients. Send us a message today for more information.