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Your Mississauga Home May Hold Significant Equity
With changes to the Canadian Mortgage Market, Equity Takeout Mortgages have been replaced by Equity Loans or in the case of the primary residence Home Equity Loans.
If you’re a homeowner your Mississauga property could represent a significant chunk of your personal wealth. A home bought several years ago may have significant equity value due to the initial down payment, repayment of the principal debt and appreciation in the value of property over time. This equity can be used as collateral for a loan.
Equity is the net market value of your property after deducting the mortgages owed on it. Equity loans are typically second mortgages so they do not replace the primary mortgage. You will only qualify for the equity loan when the equity on your property reaches twenty percent or more.
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Equity Loans – the Facts
Because it is a second mortgage, the primary mortgage will take precedence should you default on payments. The lender, in the case of the second mortgage, will receive only partial payment if there are insufficient funds made from the sale of the property to cover both. Since there is more risk to the lender of the second mortgage, the interest rate is typically higher than the interest on the first.
Because the loan is secured, equity loans tend to be a lot cheaper than other forms of finance, the term is longer and they are typically cover larger amounts. This makes them ideal financing tools for large projects such as renovations. Financing through equity loans can make the cost of large projects affordable. They are commonly used to finance expensive items over a short period of time.
A Home Equity Loan is different to a HELOC in that you will receive a lump sum payment on the conclusion of the agreement. The interest rate and monthly repayments are fixed. The loan starts to accrue interest as soon as the lump sum payment is made.
Advantages of using home equity
- A home equity loan is a great way to improve the value of your house, allowing you make improvements or to do renovations.
- The interest payments may be tax deductible if the money is used for an investment from which you earn an income.
- The equity loan can be used to consolidate high-interest debt or to fund your children’s education.
Disadvantages of using home equity
- The initial fees are high
- Inability to service the payments on the mortgage could result in foreclosure and your family could be left without a home.
- Because equity loans are based on market value, a major drop in property value could result in insufficient equity to cover the loan and you could end up owing money even after you have sold your home.
Your Mississauga Mortgage Broker Can Help You Make the Right Choices
If your credit rating is on top form, your bank may be prepared to offer you an equity loan, but they will insist that you take mortgage default insurance. This will add to the already higher interest cost, so it may be more cost effective to go to a private lender. You’ll have to pay both mortgages simultaneously so care must be taken to ensure that you can afford the repayments.
Your Mississauga mortgage broker can help you to choose the best option to suit your needs.
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