Whenever homeowners wish to take out loans on their homes, they are usually torn between the home equity line of credit vs. mortgage. Both of them allow borrowers to use their house as collateral or backing for the debt. And if they don’t keep up in repaying the creditors for the loan they took, their homes will be seized.
It is reported that more than 3 million Canadians with a HELOC owe an average of $65,000. Mortgages, however, are obviously more widely used in Canada than HELOCs but in some situations, a HELOC may turn out to be a better option than standard mortgages.
While home equity lines of credit and mortgages may seem similar, there are differences that you should know in order to make the right decision to purchase your home. This article closely examines the differences between home equity vs. mortgage loans.
A mortgage is a loan that is taken out for a home or any other piece of property. This is when a financial institution such as a bank lends money to a borrower to buy a property.
The most common types of mortgages are fixed and adjustable rates. In many cases, the borrower has to put down between 3% and 20% of a house’s total purchase price. The rest of it is offered as a loan with a fixed or variable interest rate depending on what type of mortgage it is.
Most of the time, monthly payments owed on mortgages is decided from a combination of principal and interest payments. The size of the down payment might also affect the amount that’s required in monthly mortgage insurance payments and closing fees.
Second mortgages work in the same manner as the first one in that the borrower can take out a lump sum of money and then pay back what they owe in monthly installments. Second mortgages can be used for a variety of reasons, such as consolidating bills, making home improvements, or, with the assistance of the down payment on the first mortgage, avoid paying for PMI.
Home Equity Lines Of Credit
A home equity line of credit (HELOC) works differently than a mortgage. Much like a credit card or a check, a HELOC is a revolving line of credit, which makes this option a more flexible borrowing instrument. It allows borrowers to withdraw funds over an extended period of time instead of offering a fixed sum of money upfront that immediately accrues interest.
Every year, HELOCs are gaining popularity among Canadians. Borrowers are able to use as much or even as little as they like, so long as they abide by their credit limit and ensure their account is in good standing. And because HELOCs are more flexible, borrowers can make interest-only payments outstanding balance.
Unlike conventional mortgage loans, HELOCs don’t have a set monthly payment with any terms attached to them. Due to its revolving debt, a HELOC lets borrowers make a minimum monthly payment. Borrowers must also pay the loan down before drawing out the money again to either pay their bills or work on any other project. Of course, if you don’t end up paying the bills, you could default on the loan and put your house at risk since HELOCs require you to put your house as collateral.
Because HELOCs come with a variable interest rate, you’ll get a low promotional rate at the start of the loan, and the rate will continue to increase as you’re coming into the repayment period. And if you’re choosing a HELOC with a variable rate, you should consider the caps that your creditor might place. Most lenders will have the number of rate increases capped, and some will allow you to convert the variable interest rate into a fixed one, for a fee of course.
To learn all there is you need to know about HELOC in Canada, click here.
Which Is Better?
So where do we draw the line in this home equity line of credit vs mortgage Canada debate?
Since there are several types of mortgage loans, it can be hard to pick the right one based on your needs. For instance, if you wish to have a set monthly payment and a certain timeline to pay off the debt, then home mortgage loans should be what you should opt for. It’s a great option if you wish to make home improvements or if you want to remodel, and you are aware of how much it’s going to cost.
A home equity line of credit gives you the flexibility of revolving credit. It’s an ideal choice in case you’re dealing with several projects, and you are not sure how much each of them will cost you. You can use this to cover other expenses like paying for your child’s college expenses or their wedding.
Either way, both options will put your home at risk if you’re unable to make the payments in full, even if you’re currently on your first mortgage. That’s why you have to take proper consideration of your budget to ensure you can make the payments. Only then can you decide which of these options is the most suitable for you.