Home Equity Loan is a type of Second Mortgage loan that’s given against the home equity. Equity is calculated by subtracting the amount owed on the home with the current value of the home. For example, assuming your home is worth $400,000 and you have $250,000 remaining on your current Mortgage, therefore, your home equity math break down will be as follows, $400,000 (Home Value) – $250,000 (Current Mortgage Balance) = $150,000 of available equity in your property.
Since a Home Equity Loan is based on the available equity in the home, the borrower’s income and credit score are not taken into consideration at the time of approval.
The borrower provides his/her property as a form of collateral to the lender. The lender will then provide the borrower with a Home Equity Loan by providing the borrower a loan of up to 80-90% Loan To Value (based on the borrower’s available equity in their property). It is much easier to qualify for this type of loan as it is mainly equity-based. Plus, the interest rates on Home Equity Loans are generally much lower than other types of Mortgage loans.
A Home Equity Loan can be taken for multiple reasons including Debt Consolidation, Home Renovation, improving credit score, or to obtain cash flow for personal/business use, Pay off consumer proposal or to pay off Mortgage/Property Tax Arrears.
How is home equity built?
Home Equity can be built in Four different ways – by making a larger down payment, by paying down the Mortgage, by increasing the market value of the home with renovations and additions or when the market value of your home increases on its own.
Home Equity Loans Approved In Less Than 24 Hours!
Borrow against the equity of your Property
Before approving a Home Equity Loan, the home equity lenders need to determine the property value, its marketability, its condition and the Mortgage balance. The Mortgage balance can be confirmed by obtaining a recent Mortgage statement from the borrower or by requesting an information statement from the current lender.
A Home Equity Loan is a lump-sum loan, which means the borrower gets all of the funds at once and repays it with a set/flat monthly interest only instalment payments. These payments are generally accompanied by a fixed interest rate that remains the same throughout the payment term of the loan.
The amount a borrower can borrow depends on the loan to value (LTV) ratio. A loan to value (LTV) ratio refers to the size of the loan taken by the borrower in comparison to his/her property value used to secure the loan. Homeowners can access up to 90% loan to value (LTV), in major urban areas in Ontario. Some lenders may scale back the loan to value to 75% or 80% for more rural properties that don’t have a large population. Essentially, lenders want to ensure that there is sufficient equity in the event the Mortgage falls into default, and they are able to successfully sell the property for a reasonable amount in order to get their investment out.