Borrowing Money Using Home Equity

August 23, 2012

Should you borrow money on your home? Many Canadian homeowners found themselves in serious financial difficulty after they had borrowed money using their homes as security. So is it a bad idea or not?

“Equity”, in simple terms, is what your home is currently worth (i.e. its market price) minus the mortgage you still have owing on it. If the amount remaining on your mortgage is $450,000 and your home is appraised at $750,000, you have $300,000 in equity. Having this equity means you may be able to use it to secure a loan and borrow money (e.g. $100,000) from a lender.

Should you take out a loan using your home equity as security? There are four important considerations to keep in mind:

  • First of all, there is a risk involved since the housing market fluctuates. If house prices go down, your “equity” could become insufficient to cover your loan obligations – in this case, even if you sold your home, you might end up still owing on your mortgage or the loan.
  • Secondly, you have to make sure you will be comfortable with the monthly payments involved, especially if (make that “when”) interest rates rise.
  • Next, since your home is so important in securing your debt obligations, you may want to protect your home. That means proper insurance and maintenance, but also other measures, such as protecting your home from high-risk investments such as a “hot stock”.
  • Lastly, very carefully consider the lender you choose to use. In situations like this, credit unions are a great choice since it is our basic philosophy to put people ahead of profits. If we don’t think you should take a home equity loan, we will tell you and explain why. On the other hand, using home equity to make home improvements, such as a new kitchen or bathroom can definitely make sense. Likewise, you could even use home equity to pay down high rate credit and save thousands of dollars a year on interest costs.

Either way, at Luminus Financial, we’ll put you first and help you make the right choice – one that you can live with.