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HELOC vs Mortgage: A Summary

You’ll find a marginal difference between a home equity line of credit (HELOC) and a mortgage because HELOCs are a type of mortgage. The main distinction between them is the way they work. Depending on your goals and needs, you can choose a HELOC or a mortgage as your financial tool.

What is a mortgage? 

Buying your own home requires a substantial amount of funding, but providing the total upfront isn’t realistic for most Canadians. To help with home purchases, financial institutions provide mortgage loans, which are liens from the borrower secured against a piece of property.  

Mortgages and mortgage loans are distinct concepts but tend to be used interchangeably. Mortgages are the legally binding agreement between you and the lender, while the mortgage loan is the funding secured against the home to buy the home.  

A young couple relaxing in their new home.

Conventional mortgages 

A conventional mortgage is a loan from a bank or alternative lender who agrees to buy property for you while you agree to pay interest and principal within a set time. Qualifying for a mortgage from traditional lenders typically requires a down payment, a strong credit score, and a steady income. If you’re buying property, you may need a conventional mortgage.

Second mortgages 

If you get another mortgage while you have an outstanding mortgage on your home, that’s considered a second-position mortgage. They usually come in the form of home equity loans and HELOCs, but not all home equity financing you obtain are second mortgages 

If you’re still paying for your home, the amount you borrowed from your home equity essentially adds to your mortgage’s outstanding balance. However, that portion of the mortgage is under different terms, like the interest rate and repayment time, because it’s a different agreement.  

Getting approved for a second mortgage depends on how much of your home you have paid for. The lender will provide a loan worth a portion of your property, and you repay it. Receiving an additional loan based on your home means you first have to build equity into it.  

People choose second mortgages because its one of the simplest methods to obtain the value of their home without selling it. The rates tend to be more ideal, and the amount they receive is a considerable loan that can cover costs such as tuition or renovations.

Home equity lines of credit 

HELOCs work more distinctly from other kinds of mortgages. They are a revolving credit line, so your home’s value sets the credit limit. You repay the minimum interest payment monthly, which might fluctuate due to HELOC usually having variable interest rates.  

You can borrow up to 65% of your home’s appraised value, and you can start repaying the amount that you have taken out of the limit. HELOCs also don’t come with prepayment penalties, which allows you to repay and budget according to your needs. 

People who choose HELOCs need a significant amount of funding but are not sure how much exactly they’ll need.

Home equity loans  

Another way to access your home equity as a form of funding is through a home equity loan, which is a lump sum that can help you with some of your financial needs. The value of your home determines the maximum loan amount you can receive.  

Home equity loans are potentially significant deposits, which you repay monthly with a fixed interest rate. Because of their size and predictable monthly payments, people choose home equity loans when they need quick but substantial funding, like paying for outstanding credit card debt.

Deciding what mortgage you need 

All four types of mortgages are reliable ways to borrow money, but choosing what best suits your needs requires some consideration.  

Goals 

Each type of mortgage is better for different situations. Conventional mortgages are commonly used for buying homes, HELOCs are for those who need a consistent and flexible borrowing option, and home equity loans are more for large, one-time expenses.

HELOCs are especially helpful who aren’t sure of how much they’ll need in total, so people who do small home renovations over a period of time tend to use HELOCS. On the other hand, home equity loans are helpful for people who need a large lump sum for their business or for debt consolidation. 

Financial situation 

Each type of mortgage will have different interest rates, loan terms, and eligibility criteria. HELOCs usually have variable rates, so you’ll have to account for payment changes and determine if you can manage fluctuating rates. Loan terms can also affect your monthly payments, as the amount spreads differently at varying lengths. 

Sources of financing 

You can find mortgages from various financial institutions and lenders. Depending on the kind you need and the criteria you can meet, you have two options for where you can get a mortgage.  

Bank or financial institution 

The bank is a common source for conventional mortgages and sometimes home equity financing or second mortgages. Since they are the standard, they have high expectations for their borrowers, like requiring a strong credit score or stable income. 

Not everyone will be in the same financial standing. Some will be self-employed with fluctuating income; others will have lower credit scores and are looking for ways to improve their financial management. Though they may still get approved for a loan, the bank may attach high-interest rates or offer low loan amounts. 

Alternative lenders 

When traditional lenders do not meet your needs, alternative lenders are available. They usually have more flexible eligibility criteria with their alternate solutions. Alpine Credits is one of those alternative lenders who are willing to accommodate your financial situation.  

Alpine Credits understands that every homeowner has a different financial background and believes that each one should have an opportunity to receive financing to achieve their goals. As a lender specializing in home equity loans, Alpine Credits has been helping Canadian homeowners access their home equity as a loan to accomplish their goals.

Getting home equity financing with Alpine Credits 

Approval for a home equity loan is simple with Alpine Credits. If you own your home, you’re eligible for a loan worth up to 75% of your home value. The application is straightforward and quick, allowing you to receive a loan within days. 

  1. Apply online—filling in an application with Alpine Credits is quick and does not affect your credit score. You only need to provide your personal details and your home’s appraised value. 
  2. Receive results—as long as you have enough equity in your home, you’re eligible for approval. You’ll know your application status in as little as 24 hours. 
  3. Use your loan—the funds will be deposited into your bank account within three days of approval. You can use it for outstanding credit balances, home renovation, or business investments.  
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Frequently asked questions

A HELOC can substitute a mortgage if you’re buying another house. If you have an existing mortgage, a HELOC is an additional financial responsibility rather than a replacement.   

One of the features of a HELOC in Canada is that you’re free to repay what you’ve borrowed without any prepayment penalties. The minimum requirement is to repay the monthly interest, and you can continue to purchase through your HELOC up to the maximum credit limit set by your home equity.