What Are Home Equity Loan Rates And How Can You Get The Best Deal?

Imagine that you have owned a home for a few years and now the value of your house has increased. However, you may consider home renovation, debt repayment, or financing your child's schooling. The question is: “How and where would you get this money?” Don't worry, you may get funds by applying for a home equity loan, which allows you to tap into your home equity.

In Canada, this could be a smart choice to get a home equity loan, for managing major finances such as home renovation, and consolidating debt. 

It's important to know how to get the best deal, so let's start by understanding how home equity loan rates work in Canada. In this article, we will simplify it to help you make the right decision.

What Is a Home Equity Loan?

A home equity loan is a type of consumer debt, sometimes referred to as an equity loan, home equity installment loan, or second mortgage. Homeowners might take out loans against the equity in their houses. 

The loan amount is determined by subtracting the homeowner's outstanding mortgage balance from the home's current market value. 

Home equity loans usually have fixed rates, but HELOCs have variable rates. 

Understanding Home Equity Loan Rates

In Canada, home equity loan rates are determined by factors such as lender policy, loan amount, and credit score. In general, home equity loans are lower than those of uninsured personal loans but higher than those of standard mortgages.

Usually, home equity loan interest rates are:

Fixed Rate: This ensures consistent payments throughout the loan term. The rate remains fixed over the loan period.

Variable Rate: Your monthly payments are impacted when the market rate fluctuates. 

Example:

Let’s say Lia has ownership of her home in Canada and wants to renovate her home for some time now. She applied for a home equity loan, and she was offered a fixed rate. Fixed-rate at 6.5% for a loan 50,000$, for 5 years.

On the other hand, her friend Jaren opted for HELOC, he was offered a variable rate, based on the market condition, starting at 5.5%.

Lia pays as their predictable payments and Jaren's payments fluctuate with the market. Understanding these two concepts will help you make the right choice that meets your needs.

How a Home Equity Loan Works

• A home equity loan is also referred to as a second mortgage. Your home's equity acts as a security for the lender. 

• Any homeowner can borrow a loan based on their home's appraised value, the combined loan-to-value ratio (CLTV) of 80 to 90%. The borrower's credit score and payment history, of course, also affect the loan amount and interest rate.

• Traditional home equity loans have fixed repayment terms, the borrower pays a fixed amount every month including both principal and interest. If the loan is not paid back, the house maybe sold to pay off the outstanding loan.

Benefits and Risks

• One effective way to turn home equity into cash is through a home equity loan, particularly for home improvements that raise the value of the house.

• Never forget that you could end up owing more than the value of your house if real estate values decline.

• If you decide to relocate, you could end up:

• Lose money when you sell your house.
• Be unable to move due to financial limitations.

• Avoid taking on extra debt if you are using the loan to settle credit card debt.

• Make sure it's the best choice for you and fits your financial needs by evaluating all of your options before taking out a loan.

Home Equity Loan vs. HELOC Rates in Canada

You may see terms like HELOC rates in Ontario or HELOC rates in Canada when looking for home equity loan rates in Canada. These are home equity line of credit rates, which are preferable to one-time funding for regular expenses.

So, it’s important to understand the difference between these two: a home equity loan and HELOC.

• Home Equity Loan:
• • Gives a lump sum amount.
  • Have a fixed repayment term.
  • Fixed or variable interest rate.

• HELOC:
• • Serves as a revolving line of credit.
  • Have only variable interest rates.
  • You can borrow as needed, up to a certain limit.

Home equity loan requirements

The requirement may vary, because every lender has their own requirements, but usually you need these:

• Typically 20% equity in your home 
• A sufficient income
• Fair to excellent credit score
• Some documents for the loan application include:

• Your name, the balance, the monthly payment, and the payment status are all listed on a current mortgage statement.
• Insurance proof 

You and your lender will decide on a loan amount, interest rate, and the term for repaying the loan throughout the application process.

After that, you'll fill out papers to have your home valued by your lender. Before they can release your money, your lender must place a lien on your property. Your house is used as collateral for the loan.

In theory, a lien allows a lender to take possession of your home if you default on your loan. The lien will be removed from your property as soon as the payment is repaid. 

How to apply and qualify for a home equity loan

• The process is similar to how to apply for a mortgage.
• You must provide these documents such as your income, assets, and debts. 
• A professional appraisal determines your home's market value, which you will probably have to pay for.
• You are only allowed to borrow up to 80% of the value of your house.
• Any other loans secured by your home, such as a home equity line of credit, and the remaining balance of your current mortgage is deducted from that limit. 

Example:

• Your home is worth $500,000 → 80% limit = $400,000
• You owe $250,000 on your mortgage
• That leaves $150,000 available for a home equity loan or HELOC

So, the more you owe on your home, the less you can borrow.

How much money can you borrow with a home equity loan?

                                         20%

You must have at least 20% equity in your house in order to qualify for the majority of home equity loans.

                                            80%

Usually, you can borrow up to 80% of the appraised value of your house less the amount payable on your mortgage. 

Home equity loan interest rates

Interest rates on home equity loans are usually higher than those on your current mortgage, but they are often lower than those on credit cards and other debt. 

That is the reason why lenders think second mortgages are riskier than first mortgages. Your credit score and overall financial status affect the rates that lenders provide.

If you were unable to pay off mortgage payments, your home might be sold, the primary lender is paid first. If there are any funds left, that will go to the home equity loan lender. If the sale doesn’t cover everything, you may still be in debt. 

Second mortgage lenders raise interest rates to compensate for the possibility that you won't be paid back in full if you default on your loan.

Fees associated with a mortgage include:

• Title fee and insurance fee
• Appraisal fee.
• Legal fee.
• Loan origination fee
• Discharge fee
• Brokerage fee

Title fee and insurance fee

Usually, lenders perform a title search to make sure the property is free of liens and other legal problems.

Title insurance may also be necessary to protect the lender’s interests. These costs are added to the total closing costs.

Appraisal fees

Before authorizing a home equity loan, lenders require a professional appraisal of the property to assess its present market value. Homeowners should be prepared for it because appraisal charges may vary.

Legal fee

Processing documents and closing the home equity loan require legal services. In Ontario, legal fees may cover the price of a lawyer's time, payments, and other related costs.

We suggest getting estimates from several legal experts to secure a fair price.

Loan origination fee

Some lenders charge a loan origination fee to cover the costs of processing your loan application. It's important to ask about this cost when you look for a loan, as not all lenders charge it.

Discharge fees

To cancel or pay off your existing mortgage, there could be a fee required for that, that will make room for a new home equity loan. 

Recognizing and managing funds for these expenses is essential for precise financial planning.

Brokerage fees

If you decide to use a mortgage broker to help you with the home equity loan process, you might have to pay for it. The broker is paid for their services in bringing together lenders and borrowers. 

How to Get the Best Rate

It's not that hard to get the best prices in Canada if you adhere to these guidelines. You need to take into account the following factors: 

1. Improve Your Credit Score

2. Compare Lenders

3. Consider a Shorter Loan Term

4. Negotiate with Lenders

Improve Your Credit Score

• Firstly pay off outstanding debts.
• Maintain a good repayment history by clearing all your debt payments.

Compare Lenders

• The best way is to compare several lenders. Different lenders offer different rates.
• Compare options from banks or private lenders.
• Generally, lenders base their APR on the prime rate and other factors such as the lender’s fee. APR is the one thing that must need to focus on.

Consider a Shorter Loan Term

• Just remember that if you are comparing lenders, you should check for the same terms from each of them.
• Interest rates vary according to loan terms. 
• Shorter loan terms have lower interest rates.
• If it’s possible, choose a shorter repayment term to save on interest.
• In the long run, a longer term with a lower interest rate still costs you more.

Negotiate with Lenders

• You could also negotiate with lenders, some offer loyalty discounts to their clients to keep them.
• Some lenders may be willing to negotiate interest rates, such as offering lower interest rates or eliminating appraisal or application fees. 
• Comparative shopping gives better terms or a better rate. Talk to at least three different lenders about it.
• Let each lender know you're looking around so they can compete for the best interest rates and terms.
• You have a better chance of getting a better offer if your financial profile is excellent.

In Conclusion:

Home equity loans are beneficial for those borrowers who are responsible and they know how to repay the loan. It would be more easier for them to borrow the loan, if they have a stable income, they know that they’ll be able to repay it faster.

It's a big decision to borrow money against your house, and you have to think about things like the fact that it won't be sold. Your lender may foreclose on your house if you don't make payments on a secured loan. Make sure you understand the terms, conditions, and ability to repay the loan without sacrificing other bills or financial goals before taking out a loan that uses your house as collateral. 

Not sure if a home equity loan is the best option for you? Both homeowners and renters can borrow money through an uninsured personal loan. Rateswise will help you find a loan that fits your needs, finances, and lifestyle, regardless of what your needs are.

Home equity loans provide an excellent means of getting funds at affordable interest rates, by comparing them with credit cards or personal loans.

You may get the best offer by comparing lenders, raising your credit score, and being aware of home equity loan rates in Canada. Always do some research and pick the solution that best suits your finances.

You can save a significant amount of money over time if you take some time to compare your options! 

Disclaimer: This content is based on current facts and intended purely for informational purposes. Always ask your lender about current details.