Home equity is a quick source of cash that is widely accessible yet risky. Our Neighborhood Specialist Ryan Philippe provides us with recommendations to avoid risk and use equity to your advantage.
Home owners in “hot” real estate markets such as Vancouver and Toronto have recently experienced a steady increase in their equity. In 2015, Vancouver houses experienced a price increase of 25% while the adjusted industry benchmark price hovered around $1.3 million.
Home owners can exploit rising home prices in various ways, but the appropriate method will depend on a person’s individual preferences, financial position and priorities, and risk tolerance.
To find the right strategy for efficient use of home equity, we referred to our Neighborhood Specialist Ryan Philippe to provide us with recommendations.
My equity has increased. What options do I have?
Home equity refers to the difference between the property market value and the mortgage balance of a house. Equity can be used for a variety of purposes, such as:
- Buying an investment property
- Upsizing your home
- Mortgage pay-down
- Investing in financial assets
Of the items listed above, mortgage pay-down is the preferred choice for a risk-averse individual. In addition, it incentivizes saving and reduces the loan amount, thereby increasing your cash flow. Investing, on the other hand, carries risk. Nevertheless, investing in low risk financial assets could be the ideal choice to protect your equity against market fluctuations.
Types of Home Equity Loans
A home equity loan represents a quick and accessible alternative for cash. It is characterized by low monthly payments, long payment terms, tax deductible interest, and a one shot fund that can be accessed at anytime.
These four pillars make home equity loans extremely appealing and attractive to customers who have the option to choose either a fixed rate loan or a home equity line of credit (HELOC). While interest rates on equity loans are higher than those of mortgages, they are lower than credit card interest rates. However, it is a double-edged sword as there is no return without risk.
On the one hand, a fixed rate loan is less risky as the interest rate remains constant. On the other hand, a HELOC is based on a variable rate that reacts to the banks’ prime interest rates by either increasing or decreasing. Also, borrowers can sometimes be deceived by the ease of spending and, as a consequence, fail to plan their monthly payments accordingly.
The term of the loan, called the draw period, must be repaid in full at the end of the term. If repayment fails to materialize, not only will your credit score be severely damaged and will you be forced to declare bankruptcy, but your home will also be foreclosed as the lender aims to sell it to regain the loan amount. In other words, your are putting your home on the line.
Given the long-term financial and personal implications that the downfalls of equity loans can cause, a detailed and cautious financial review must be conducted to make a well-informed financial decision.
On a final note, Ryan Philippe advises buyers who are looking to upsize to buy up in a down market for several reasons:
- Potential rising equity in the future
- Strong cash flow
For example, if you have a home that is valued at $100,000 and the market goes down 10%, then the home sells for $90,000 and you would have a $10,000 loss. The buyer then purchases a home previously valued at $200,000 for $180,000, which represents a $20,000 gain. Taking the difference between the $10,000 loss and the $20,000 gain, the buyer will be up by $10,000 overall.
Beware of rushing expensive upgrades to a property in a down market. The trend today is to have quality and cost-efficient upgrades. Most importantly, patience is key as it allows you to purchase the property at the best price possible.
With that being said, it is in everyone’s best interest to live within their means and avoid getting caught in the cycle of debt. Aggressive spending and consumption backfires in the long term. Home equity loans could be used to take care of major expenses such as unexpected medical bills and education costs that are necessary and fundamental.
We would like to thank Ryan Philippe, who specializes in Ottawa, for his recommendations and insights. Known for his honesty and dedication, Ryan can find your ideal home and guide you through the buying process.
Blog written by Assad Dandashi from www.Navut.com