Whether you are tired of putting off the remodeling of your home or you need extra cash for your child’s college fund, a home equity loan could be the answer you are looking for. Especially if you have lived in your home for several years (and have made regular payments on the mortgage’s principal), the equity accrued allows you to borrow against the home’s value. As long as your home’s value is more than what’s owed, you can borrow a lump sum of cash to use for whatever you wish. Let’s dig a little deeper…


How it works

Your home’s equity increases as you pay your mortgage and as (or rather, ‘if’) your home’s value increases. As we stated earlier, as long as your home’s value exceeds the principal owed on the mortgage you have equity that is borrowable whenever you need it. The good news? You don’t need a professional to figure out how much equity you can borrow, as you can do it from home using this simple formula.

Let’s calculate together…

Value of the home – the amount owed on your mortgage = your equity.

As an example, let’s assume you purchased your home for $200,000 10-years ago and have paid $100,000 toward the principal, leaving you with a balance of approximately $100,000. Let’s also assume that your property value has increased $50,000 since the purchase. Plugging all of this information in:

$250,000 – $100,000 = $150,000

You can see that the amount of equity you can borrow against is approximately $150,000.  This isn’t a real-world number on how much cash you will have in-hand, though. The Canadian government has a fantastic reference table to figure out how much cash you can actually borrow. If you’re still confused as to which option works best for your situation, give us a call.

Be cautious…

A home equity loan sounds like a great idea and it is – when the housing market is stable. If the housing market ever starts acting funky (case in point: the American housing crash of 2008), your home is likely going to lose value. Less value equals less equity, and if you’ve already borrowed against that equity? You may find yourself owing on the equity itself – completely going against the very reason of getting a home equity loan in the first place.

Keep in mind that borrowing equity against your home isn’t something to take lightly. While it’s great to know that you have access to quick cash when you need it, it’s still a loan. If you are unable to pay back the borrowed equity, you’re going to lose your home. Thus, seriously consider the best option you have when borrowing against your home’s equity; in some cases, taking out a traditional bank loan may be a better option. Borrowing money is never something you should take lightly no matter how you do it: always be certain you can pay back the money in full on time, every time. This goes doubly when borrowing against your property; remember, pay the loan, keep the home!  Do this for the life of the loan, and you will find that a home equity loan can be an amazing tool for getting extra cash when you need it the most. If you are wondering if a home equity loan is right for you, give me a call.