What Is Home Equity?
Home equity is the portion of your home which has been paid off to date and is therefore actually owned. Home equity can be calculated by determining the current market value of your house, and subtracting the remaining amount owing on your mortgage.
For example, if your home’s market value is $1,000,000 and your remaining mortgage is $600,000 your equity would be $400,000.
Two factors will commonly affect your home equity. The market value of your home will fluctuate and influence your potential equity. A strong market can increase the home value, and therefore the possible equity. Secondly, the balance owing on your home. With each mortgage or loan payment your equity will increase.
What Is a Home Equity Loan?
In Canada, “home equity loan” is an all-encompassing term used to describe various loan types which use the borrower’s equity in their home as collateral. Types of home equity loans include:
- Home equity line of credit (HELOC) is a line of credit that uses your home as a guarantee the loan will be repaid. A HELOC in Canada can be issued for up to 65% of your home’s market value. The main benefit of a HELOC, as opposed to a mortgage, is that HELOCs allow you to borrow up to your credit limit and pay off at your own pace with great flexibility. In many ways, these products function more like a credit card than a mortgage.
- Second mortgages are mortgages taken out on your home, which sit on top of an already existing first mortgage. A second mortgage allows homeowners to borrow money from the equity in their home, without refinancing their current mortgage. Using your home as collateral, you can obtain funds to finance projects, consolidate debts, and major purchases.
- Reverse mortgages are mortgages accessible to senior Canadians (55+) which allow homeowners to convert up to 55% of their home equity into cash, tax-free. These funds can then be used for any needs necessary, including renovations, major expenses, or debt.
- Refinancing a mortgage is when a homeowner takes out a new loan to pay off their original mortgage(s), typically in order to reduce their interest rate. Generally, the loan used for refinancing has its own terms, unique from the original mortgage and can be from a separate lender.
Depending on your credit score, employment and income you can obtain a home equity loan from several different lender types.
- ‘A’ lenders – such as the major Canadian banks
- ‘B’ lenders – which are smaller lending institutions offering higher rates but more tolerant qualification standards
- Private lenders – typically investment corporations or private individuals who offer the most lenient qualification criteria, but also the highest rates
Disclaimer The information provided by the Rateco home equity loan calculator is for illustrative purposes only and accuracy is not guaranteed. The values and figures shown are hypothetical and may not be applicable to your individual situation.
Qualification for mortgages or loans requires additional information such as credit scores and existing debts which is not gathered in this calculator. All information such as interest rates, monthly mortgage payments, fees, etc. are estimates and should be used for comparison only.