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Unlocking your home’s worth: HELOC vs home equity loan 

Homeowners in Canada have a valuable financial resource that not many realize is available to them, and that would be their property and home equity. Home equity can be accessed in different forms, such as loans and lines of credit. 

A brief introduction to home equity 

Home equity represents the value of your financial interest in your home, and you can determine it by calculating the difference between your house’s appraised value and outstanding mortgage balance. If your house has high value and you’ve paid a significant amount of your mortgage, your equity will be larger.  

An illustration of how home equity works.

Building equity is an ongoing process of homeownership. The longer you’ve been building your equity, the more value you may be able to access through a home equity loan or line of credit. The minimum amount of mortgage to be paid will be different at each lender, but many start with at least 25% of the home’s value covered.  

Exploring home equity loans 

Home equity loans are installment loans; a lender provides you with a lump sum, and you agree to repay it with interest. The frequency of your payments can be determined during prior discussions with your lender. 

As a loan from your home equity, the maximum loan amount is set by your home value. In Canada, you are permitted a home equity loan of up to 80% of your home value, depending on the lender, but you don’t have to withdraw the entire amount. Some lenders may operate under that bandwidth so that maximum loans can range from 70-80%. For example, Alpine Credits offers a maximum of 75%.

How a home equity loan works 

The expectation for a home equity loan is that you start repaying the loan balance on the following due date. Home equity loans usually have monthly payments, with the repayment period typically lasting between five to fifteen years. However, it can go up to 30 years in some cases.

A closer look at home equity lines of credit (HELOCs) 

As its name suggests, HELOCs are lines of credit where your home equity sets the borrowing limit. They are also revolving loans, so they give you the opportunity to borrow money and repay for a set amount of time. HELOCs also usually come with variable interest rates so interest payments may fluctuate.

How a home equity line of credit works 

Once you have established your HELOC with your lender, you can start using it towards your plans and purchases. Since the line of credit is flexible, you can borrow as much as your limit allows.  

One distinguishing feature of HELOCs is that the minimum monthly payment is the interest on the amount you borrowed, but you can also make contributions to the principal. If you start paying some of the principal right away, lenders may not charge any prepayment penalties.

Comparing HELOCs and home equity loans

After understanding the details of home equity loans and HELOCs, the next step is to decide what would work best for your situation. Both provide several advantages and will have different effects on individual homeowners.

A comparison between a HELOC and a Home Equity Loan.

Pros and cons of a HELOC and home equity loan 

Home equity financing can be the financial tool that helps you achieve your goals, but it also requires borrowers to consider some factors before committing.  

Pros 

  • Flexibility—home equity funding can be used for any purpose, unlike standard personal loans or credit cards. If you have two objectives, you won’t have to apply for two separate loans to accomplish them.   
  • Potentially significant amount—with high property appraisal values, homeowners could get loans worth hundreds of thousands of dollars. Other loans and credit cards are less likely to have the same offer because they may require a good financial standing or high income.  
  • Lower interest rates—the interest rates are reasonably low for the amount that home equity funding offers. Compared to credit cards and unsecured personal loans, home equity financing helps you save on interest, allowing you to build healthier financial habits.  

Cons 

  • Additional closing costs—appraisal fees or broker fees may be included in your loan’s closing costs. Be sure to take them into account as you’re finalizing your decision to get home equity financing.  
  • Require homeownership—newer homeowners and renters will not be able to access home equity funding because they will not have access to significant equity or any equity at all.   
  • Another mortgage—if you’re still paying your primary mortgage, paying for a HELOC or a home equity loan is another financial obligation that requires diligence. While they are good funding sources, you’ll have to ensure you can repay both mortgages.  

Like any loan or line of credit, those based on your home equity need just as much consideration. It’s good to practice caution with loans secured by assets, but the chances of the worst occurring are low. With good habits and the right lender, home equity and HELOCs can be a good choice for some of your financial goals.

How to choose a home equity financing option 

Choose a home equity loan if 

  • You prefer a fixed monthly payment—as a fixed-rate loan, you can be assured that you’ll have predictable monthly payments, allowing you to budget accordingly. 
  • need a large, one-time deposit—home equity loans are frequently used for one or two major goals at a time, such as consolidating credit card debt and outstanding loans. 
  • You manage your finances well—acquiring a substantial amount of money can lead to overspending if not managed appropriately.  

Choose a credit line from your home equity if 

  • You’re not sure how much you need—sometimes you can experience unforeseen changes in budget, so HELOCs allow for that flexibility. 
  • Need consistent funding for a period of time—small-scale home renovations are the most common example. They allow homeowners to withdraw when they need to.  
  • Prefer to only pay interest for some time—with fluctuating payments because of the variable rate, HELOCs allow homeowners to focus on the interest payments for some time until they’re able to repay the principal again.

How you can use home equity financing 

Accessing a home equity loan gives borrowers a lot of spending flexibility. Some common reasons for homeowners to use home equity loans include the following. 

  • Loan consolidation—you can use a home equity loan to repay any outstanding balances from credit cards and other loans. Home equity loans are big and can potentially leave you with just one manageable payment towards the home equity loan. The interest rate would also be lower than it would be if you were paying all your obligations separately.  
  • Business capital—many entrepreneurs use a home equity loan towards their business, like buying equipment. Getting a home equity loan can be faster than getting one at the bank because you do not need to provide a business proposal like standard business loans.  
  • Home renovations—homeowners improve their property to make it more comfortable or increase its value. With a home equity loan, homeowners are free to make significant changes in a shorter amount of time, and they would spend less on interest compared to expensing all the costs to their credit card.  

Requirements for HELOCs and home equity loans 

One of the features of home equity financing is its simple eligibility criteria. Rather than using your financial details to determine your approval for a loan offer, home equity financing mainly uses your home’s equity value.  

  • Homeownership and sufficient equity—lenders vary, and the minimum amount of required equity can change between them. They could each ask for a minimum of 20-30% equity.  
  • Canadian residency or citizenship—permanent residency and citizenship holders can only receive home equity financing.  
  • Minimum 18 years old—the legal age in most of Canada is 18 years old, which also determines the age at which people are allowed to borrow.  

HELOCs and home equity loans may have different requirements if you get them from traditional financial institutions. On top of having enough equity in your home, you’ll also need a strong credit score, a steady income, and a low debt-to-income ratio 

At the bank, not meeting the minimum requirement decreases your chances of getting approved. Some homeowners get approved nonetheless but may not be offered their ideal rate or loan amount. Because of the banks’ criteria, many homeowners turn to alternate lenders because their requirements are more reasonable.

What’s the difference between HELOC rates and home equity loan rates? 

HELOCs usually have variable interest rates, while home equity loans usually have fixed interest rates, and they may vary depending on the lender and your financial standing. Some lenders will offer set rates regardless of your score or equity, but some will use some of your details to finalize a rate offer. 

Are home equity loans better than HELOCs? 

In a way, home equity loans can be better than HELOCs. Monthly payments are unpredictable with a HELOC, especially since the mortgage rate in Canada has been rising over the past few years. Repaying the principal and the interest can be more challenging during times of high interest rates, which can end up being more costly in the end compared to home equity loans.  

Home equity loans also tend to have a higher borrowing limit than HELOCs. You can access up to 75% of your home value with a home equity loan from Alpine Credits, but HELOCs are limited to 65%. As a result, home equity loans can provide more financial support.

Home equity loan application process with Alpine Credits 

Alpine Credits offers specifically home equity loans, and applying for one is straightforward. Unlike traditional lenders, we do not require your income or credit score. To be eligible for a loan, you only need to own at least 25% of your home.  

  1. Submit an application—many lenders allow you to apply online, but you may choose to walk in or call if you prefer.  Gather the proper documents, including proof of ownership or identification. 
  2. Wait for approval results—as long as you own your home, you can get approved in as little as 24 hours. Alpine Credits processes applications faster than traditional lenders, allowing you to access funding significantly sooner.  
  3. Use funding—you’ll find the money in your bank account within three days of getting approved. You can use the money as soon as you receive it.  

Conclusion: home equity is a valuable tool  

In Canada, property value has steadily increased, giving homeowners an advantage through the equity they’ve built over the years. Accessing home equity as a loan or a line of credit is a common strategy for homeowners to improve their financial situation by consolidating outstanding balances or renovating their house to be more comfortable.

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Frequently asked questions

Having a HELOC and a home equity loan on the same piece of property simultaneously is possible but should be done with consultation. Normally, financial goals can be achieved with either a HELOC or a home equity loan.

Homeowners may sell their house even while they have a home equity loan or line of credit, but in doing so, they also repay the outstanding balance. While fully repaying the loan is suitable, homeowners will no longer have access to the equity to spend, and some lenders may also put penalties on early repayments.

Fluctuations in the market are normal, so the effects of change are minimal. If property values fall, lenders will not act until the drop is significant enough. On the other hand, if property values rise, the line limit or loan amount will not change unless the borrower asks to modify the terms of the agreement.

Both are good choices for funding your home improvements. What makes one better than the other is your preference. HELOCs allow you to continuously borrow from your home equity, while home equity loans allow you to set a budget right from the start. Whichever suits your financial needs best can help you determine your choice.