If you have been thinking of purchasing a second home, such as a rental property or vacation home, you may consider mortgage services options in Mississauga. You may have heard of cash-out refinancing, second mortgages, and home equity financing.
This guide will explore how to use your home’s equity to purchase a new, second home. While it isn’t a one-size-fits-all solution, drawing on home equity can help you pay down debt and increase cash flow to ease financial burdens. Read below to learn more and see if this is the right option for your needs.
What is home equity?
To put it simply, home equity is calculated by subtracting how much you owe on your mortgage from the value of your home (or purchase price). The difference is how much home equity you currently have. As you continue to pay your mortgage or if your home’s value increases due to market changes, your home equity also increases. Over years of paying down your mortgage, you may qualify for a loan to leverage this home equity.
Home Equity Line of Credit (HELOC)
A home equity line of credit (or HELOC for short) is a type of loan offered by some lenders, which uses your home as collateral as you borrow against the equity you have established. It can be a good option if you are looking to purchase an investment property or a secondary property. Interest rates for home equity loans are typically lower than with other loans due to their nature.
One advantage is that you wouldn’t need to draw from retirement savings or other assets if you choose to use a home equity line of credit. Therefore, your investment savings and property can continue to grow and appreciate undisturbed.
A home equity line of credit works just like any other line of credit in that you can withdraw from it whenever you need to, and there is a maximum limit that you can’t exceed. You can use it for renovations, home improvements, high-interest debt and many other things down the line as well. To receive a home equity line of credit, you will need to get approved by your lender before receiving the funds.
Increasing Cash Flow and Lowering Fees
One of the advantages of using your home equity to purchase another home is that it can be cost-effective and help improve cash flow. First of all, home equity loans are less effort for lenders and usually come with lower fees and lower closing costs than regular mortgages. This can potentially save you money in the long run as it could mean providing you with the means for a larger down payment on your new property. That could mean smaller monthly mortgage payments and more cash flow from your investment property.
Like with any type of debt or loan, there are potential downsides and disadvantages that you need to be wary of. If you plan to utilize your home equity to purchase another home, keep in mind that your primary residence will be in jeopardy if you default.
Also, since home equity loans typically have shorter terms than average mortgages, you may need to make larger payments each month. Keep in mind that the interest rates on these types of loans are usually variable, which can be subject to market fluctuations and rise over time.
Another disadvantage to using a home equity loan to finance another property is that it ties up many of your assets in the real estate market, which could leave you vulnerable if property values decline.
A smart tactic is to diversify your assets, so you do not need to depend on one type of investment should the economy change. You need to decide whether more exposure to the real estate market is beneficial for you and your finances. If you become underwater on multiple properties, it can quickly turn into a desperate and frustrating situation. Be realistic about your goals and realize that returns are never guaranteed on any investment.
Using a HELOC to secure a second home can be a worthwhile endeavour for many. Remember that you may be entitled to tax deductions and write-offs for your home equity loans depending on your particular situation.