Borrowing Money from Your Home: Mortgage vs. HELOC
Do you want to borrow money from your home but aren’t sure how to do it? Let’s discuss the two most popular ways to do it: mortgages and HELOCs.
Let’s say you want to borrow equity from your property. Maybe you want to do home renovations, use it to buy investments or pay off debt. Your first option would be to take it out as a mortgage.
The benefit of borrowing funds as a mortgage is that you can borrow more. With a mortgage, you can go up to 80% of your home’s appraised value.
Another benefit is interest savings. A mortgage is typically the cheapest way to borrow funds. You’ll be hard-pressed to find a more affordable way to borrow money.
A mortgage makes the most sense when you want to use the funds immediately. Maybe it’s for the down payment on a property or home renovation you’re doing in the next month or two. A mortgage can be worthwhile if you’re using it almost right away.
Mortgages aren’t without their downsides. Your monthly payment will typically be higher than if you borrow the funds, as we’ll discuss the second option next.
Besides that, the second way to borrow equity from your home is a HELOC. HELOC is an acronym that’s short for Home Equity Line of Credit. A HELOC is like a personal line of credit, except, unlike a personal line of credit, it secures the equity in your home. That means it almost always comes with a lower interest rate. The typical interest rate on a HELOC is Prime Rate plus 0.5%.
HELOCs make the most sense when you may not need to use the funds immediately. Unlike a mortgage, where you start paying interest immediately on the borrowed funds, you don’t pay any interest on a HELOC until you withdraw the funds. For example, if you are using it towards a down payment on a property, you’re not sure when you will buy, and that’s when a HELOC can be handy. You won’t be paying interest if buying the home takes you longer than expected.
Your minimum payment will also be typically lower with a HELOC. You can make interest-only payments with a HELOC, making it more affordable than a mortgage, where you need to make payments that consist of both interest and principal.
HELOCs are also great when you may need to re-borrow the funds again later. Like a credit card or personal line of credit, once a HELOC is paid back, you can immediately re-borrow the same amount. This makes it great for anyone who wants an emergency safety net.
HELOCs do have their limitations, though. If you’re looking to borrow a large sum, a HELOC only lets you borrow up to 65% of your home’s appraised value. This is fine for most. However, this may not be enough for some, so it’s essential to be aware of this li
How the Canadian Mortgage App Can Help
The Canadian Mortgage App makes it easier to decide whether to go with a mortgage or HELOC.
With the Canadian Mortgage App, you can calculate your monthly payment under both and decide which option you’d like to go with.
What are you waiting for? Download the Canadian Mortgage App today to try it out.