Take out a home equity loan

Home loan, reverse mortgage and saving for a real estate concept
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A home equity loan is often called a "second mortgage." When you apply for one, you ask for a set amount of cash and use your home's equity as collateral. If your lender agrees to play ball, you’ll receive the full amount all at once and then start paying it back — on a fixed payment schedule and at a fixed interest rate.

You'll need enough equity built up in your home to offer value as collateral. Having good credit will improve your chances of accessing the money you need; take a free look at your credit score and see if it needs fixing.

In addition to uses that include paying down debt or covering the cost of a child's education, a home equity loan can help make your home more valuable. Typically, the interest rate will be lower than the rate on a credit card or personal loan, so a home equity loan can fund renovation projects that add value.

Open a HELOC

Home equity line of credit HELOC documents.
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While a home equity loan provides a one-time infusion of cash and charges you a fixed interest rate, a home equity line of credit is an ongoing arrangement that involves a variable rate. But HELOCs are a little more complicated than that.

They break down into two parts: the draw period, when you can withdraw cash at your own pace until your borrowing limit is reached; and the repayment period. Both phases can stretch out for years, maybe even decades in the case of repayment. But once the draw period ends, your HELOC borrowing is done.

Though it’s called the draw period, you still have to make payments during that stage of the loan. The payments are often fairly manageable because they’re interest-only. Once you officially move into the repayment period, the principal of your loan gets factored into your payments — and they become much larger.

That's one of the more prominent risks of a HELOC: uncertainty. You won’t be making fixed payments or paying a fixed interest rate, and those things can make a home equity line a challenge to budget around.

Refinance

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With HELOC and home equity loan interest rates hard to find at under 2.5%, refinancing your mortgage might be your best, most affordable option for tapping into the equity in your home.

With a refi, you can choose to replace your current mortgage with a new, larger one — and take the difference in cash. The new loan pays off the existing mortgage and is then paid off in monthly installments.

Lenders generally allow you to borrow up to 80% of your home's appraised value in a refi. If your home is worth $400,000 and your lender approves an 80% refinance, you'd receive as much as $320,000. If you still owe $200,000 on your first mortgage, you’d pay that off and have $120,000 in tax-free cash to play with.

Considering the incredibly low interest rates you're likely to pay these days, you can see why so many Canadians have refinanced over the past year. Even if you don't choose to withdraw cash in a refi, you can still significantly reduce your monthly mortgage payments by lowering your interest rate.

No matter how you choose to access your equity, talk with a financial adviser to make sure it's a wise move for you. Whether it’s a refi, a HELOC or home equity loan, your home will be your collateral. If you fall behind on your payments, you could wind up losing the house — and all your equity will disappear.

Other ways to unlock some extra cash

Young couple looking at their housing expenses.
@Plotulit / Twenty20

Homeownership can be a constant financial grind. From the mortgage to the taxes to the maintenance costs, rarely a day goes by without some major expense occupying at least a small chunk of your cranial real estate.

If your home sweet home is a bitter pill for your budget, you have several ways to boost your finances.

  • Drive more income. Take advantage of the post-pandemic hiring boom and see if you can find yourself an exciting, higher paying job. Popular recruitment sites can put you in touch with your next employer. A few specialize in finding you more flexible work arrangements if the pandemic has thrown your work-life balance out of whack.

  • Wipe out high-interest debt. If you’ve been using credit cards to cover the extra costs of being a homeowner, those high interest rates can be a real drag. Consider rolling all of your debts into a single, lower-interest debt consolidation loan to erase your debts more quickly and affordably.

  • Get a piece of the stock market. You don’t need the proceeds of a hefty cash-out refi to get in on today’s stock market fun. A popular app helps you invest in a diversified portfolio using little more than "spare change" from your everyday purchases.

About the Author

Clayton Jarvis

Clayton Jarvis

Reporter

Clayton Jarvis is a mortgage reporter at MoneyWise. Prior to joining the MoneyWise team, Clay wrote for and edited a variety of real estate publications, including Canadian Real Estate Wealth, Real Estate Professional, Mortgage Broker News, Canadian Mortgage Professional, and Mortgage Professional America.

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