Compare Home Equity Loans

The quickest way to compare home equity loans is to compare the rate, however this might not be the best way. Whether you need to set up a home equity loan or mortgage to purchase a new home; purchase an investment property; to get a lump sum of cash to make a large purchase or refinance an existing home equity loan to consolidate debt. It's important to understand what you are getting.

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For a free, no-obligation conversation about your home equity loan needs, call toll-free today on 1-877-386-7745. We're waiting to help you.

Best Rate

The interest rate is just the first step to compare home equity loans. You also need to compare different banks and lenders. Getting the lowest rate will certainly save hundreds if not thousands of dollars over the term of the mortgage.

Compare home equity loads before making a decision

Pre-Payment Privileges

Another important feature to consider is the pre-payment privileges offered by the lender. Some lenders allow us to apply additional lump sum payments toward the principle of our mortgage to pay it off faster. Some allow a 10% lump sum pre-payment each year, some allow 25% and there are many in between. The lump sum prepayment is generally based on the original principle but could be base don the current balance.

Some lenders offer "No Frills" mortgages (home equity loans) where the borrower isn't allowed to make any additional payments toward the principle during the term. The "no frills" mortgage will often have a lower rate than a regular mortgage. There are also restrictions with many of these "no frills" mortgages that will not allow us to refinance the mortgage in the future.

With the lower interest rate we might be stuck with this mortgage until the term ends. The only way to get out of the mortgage is to sell our home.

Compare Home Equity Loans: Penalty Calculations

Another important consideration when we compare home equity loans is the penalty. How is the IRD penalty calculated? Some lenders base the calculation on their current posted rates, some base the calculation on the current Bond rate, some use their current best rate and others have some sort of a combination of these. If the calculation is based on the bond rate, then the penalty is generally much higher than if it is based on the banks current posted rate or a discounted rate.

Fixed vs. Variable

When comparing the rate, we should always ensure that we are comparing a fixed rate to a fixed rate or a variable rate to variable rate. Sometimes it appears that we are looking at the fixed rate, but the variable rate is being advertised instead. Historically, we have found that when we compare home equity loans the advertised variable rate is lower than the advertised fixed rate, but sometimes the variable rate can be higher.

If we want to refinance our home and tap into some of our built up equity, the best place to start is with the rates. The next step is to check to make sure we compare apples to apples. Compare open to open mortgages, closed to closed, 5 year fixed to 5 year fixed, 5 year variable to 5 year variable.

Once we are satisfied that we are comparing the same type of mortgage or home equity loan, then we need to compare the lenders terms for repayment and flexibility. We also need to consider what might happen if we want to do something during the middle of the term. We need to compare how they calculate the penalty or if they even allow us to change the mortgage during the term.

You can find out about fixed rate mortgages, variable rate mortgages, and open or closed mortgage rates. You will see the rates, payment options, terms and amortization periods. Most of the information we need is easily available, but some of this is a little harder to find to realistically compare home equity loans.

However, if you are having trouble understanding all the options, why not let us help you compare home equity loans? Click here to request assistance.

Compare Home Equity Loans: Understanding Home Equity

Compare home equity loans

To calculate the equity in our home, we calculate the difference between the current market value of your home and how much you owe. This includes our mortgage and any other debts we may have registered against our home.

For example, if we have used our home as collateral for other loans, those loans are counted against our equity. This means that if we sell our house, all loans secured by our house must be paid first.

Your equity increases with mortgage payments and with paying down other liens we may have registered on title. The less money owing against our property, the higher your equity will be.

In Canada, we can purchase a home with as little as 5% down but we must have at least 15% equity in our home to refinance it. If we purchase or refinance to 80% of the value of our home (or with 20% equity) then this is considered a conventional mortgage. If we purchase with less than 20% down or refinance with less than 20% equity, then this would be considered a high ratio mortgage (or Home Equity Loan). The lower the equity in our home, the higher the risk the lender is taking to provide financing.

Why Use the Equity in Our Home as Collateral?

Your home is probably the biggest investment we will ever make. As we pay off our mortgage, we slowly built up equity in our very valuable asset (our home).

We can use this asset to our advantage. We can set up a home equity loan, or mortgage, to:

  • Make home improvements to keep our house in good repair which will increase the value of our home
  • Fund our education for a higher degree, or to fund our child's education
  • Consolidate high interest loans and credit cards
  • Buy investment property or invest in some other business opportunity
  • Purchase investments or to Top up our RRSP's

When we apply to refinance our home, most lenders want to know what we will be using the money for. Our purpose for the funds can increase or decrease the risk the lender is taking when lending money to you.

If we are renovating, then the home's value will likely increase and the lender is taking less risk. If we are quitting our job and going back to school, then lender will be concerned about how we plan to make the payments. In this case, the lender's risk might be increased.

Even though they have our home as collateral, they do not like to lend money when the risk of receiving the money back is too high. True, it is technically our money, but the only way we can access it is to either sell our house, refinance our home.

Compare Home Equity Loans: Refinancing

Refinancing your home means we obtain a new mortgage to pay off our current mortgage. This may be a good option for getting a home equity loan because our new home equity loan is wrapped into a new mortgage.

This means we can access your equity without an extra payment and without selling our house. Our new mortgage can include the amount we currently owe on our house plus the amount of equity we wish to borrow up to a maximum of 85% of our home's value.

Contact Us FREE Today!

For a free, no-obligation conversation about your home equity loan needs, call toll-free today on 1-877-386-7745. We're waiting to help you.

Your new mortgage payment will be a little higher, but it will probably be less than if we had a mortgage payment and a home equity loan payment every month.

One drawback is that our current lender may charge early repayment penalties to relieve our mortgage obligations. In most case these penalties are either:

  • Equal to three months worth of interest charges
  • Interest Rate Differential (IRD)

Lenders all calculate their penalties differently. Before going through the process of setting up a new mortgage or home equity loan it's important to ask about the payout penalty. Each lender will calculate the penalty a little differently, ask for an "information only" payout summary.

This summary will detail exactly what the penalties will. This will also help clarify our choices and options for refinancing. If the penalty is too large, we may consider a second mortgage or home equity line of credit instead and keep the existing mortgage the way it is.

When we compare home equity loans, the option to get an equity line of credit will definitely come up.

What is a Home Equity Line of Credit?

A home equity line of credit (HELOC) is a line of credit that uses our home as collateral. A home equity line of credit can be in first position or second position on title. That is, the HELOC can has a preset limit, typically to a maximum of 80% of the value of our home. With a HELOC we can use all of the funds, or none of the funds or any amount in between.

HELOC in First Position

For example, our home is worth $100,000, we could set up a HELOC for $80,000 and use some or all of this money for any reason we wish.

HELOC in Second Position

For example, our home is worth $100,000, we currently have a mortgage of $35,000, we could set up a HELOC for $45,000 ($80,000 is the maximum financing minus $35,000, our current mortgage, therefore $45,000 is the difference)

Compare Home Equity Loans: Home Equity Loan Rates

With a HELOC, the interest rate is almost always based on the bank's prime lending rate. Currently, HELOC's are priced from prime plus 0.50% to prime plus 1.0% depending on the lender. They are generally open for prepayment, therefore we can pay them off any time and then access funds again any time we wish.

Some lenders offer the same rates for HELOC's in first and second position, some charge a higher rate for HELOC's in second position. Some don't allow HELOC's in second position unless they are second behind a mortgage with the same lender.

A credit credit card is an unsecured line of credit based solely on your credit rating and ability to pay.

With a HELOC you can access the built up equity in your house without the hassle and obligations of a traditional loan. The terms are flexible and once we have it set up, we don't have to keep going back to the bank to get approval to draw funds out. We can draw out as much or as little up to our approved limit.

We only use the money you need and pay interest on the funds that we use. We can pay back as much or as little as we can afford, but are usually required to pay a minimum of interest only. This makes a HELOC a very useful financial planning tool.

When you compare home equity loans, we should also consider if a home equity line of credit might suit our needs better.

HELOC Versus Home Equity Loan

There really is a huge difference between an HELOC and a home equity loan. Both generally have low interest rates, but HELOC rates are based on the prime rate which is usually lower that the fixed mortgage rates.

With a mortgage or a home equity loan, we are bound by the terms. The mortgage has a fixed minimum payment of principle and interest. If we suddenly become ill or have an accident that prevents us from working, our minimum payment must still be made, on time.

With a HELOC we have the option of making an interest only until we are back on your feet and can afford to make higher payments.

Thinking about these risks, we should also consider Life Insurance, Critical Illness and Disability Insurance for our Mortgage & Home Equity Lines of Credit. Visit Canada Life Insurance Companies to request a quick quote. With Critical Illness or Disability coverage we can have the insurance company make our payments until we get back to work..

Alternatively, if we suddenly come into a lot of money, we can pay off our HELOC without any penalties. Our home equity loan is not as easy to get out of. There would be penalties if we paid more that the pre-payment privileges allowed.

Contact Us FREE Today!

For a free, no-obligation conversation about your home equity loan needs, call toll-free today on 1-877-386-7745. We're waiting to help you.

So, when you compare home equity loans, don't forget to look into home equity lines of credit.

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