Using your home equity for financial emergencies
You may have read about using home equityEquity Two meanings: 1. The part of investment you have paid for in cash. Example: you may have equity in a home or a business. 2. Investments in the stock market. Example: equity mutual funds.+ read full definition to help pay your bills or give yourself some added financial flexibility. Borrowing money can be a good financial strategy, if you can manage the debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition and pay it back on time.
Home equity explained
Home equity is the difference between how much your home is worth and any outstanding loans on the property, like a mortgageMortgage A loan that you get to pay for a home or other property. Often the loan is for 20 years or more. You make a set number of payments for a set amount each year.+ read full definition. For example, if your home is worth $900,000 and the outstanding balance of your mortgage is $500,000, your home equity would be $400,000.
Borrowing against home equity
There are several ways to borrow money using your home equity as collateralCollateral Property or assets that you pledge as a borrower as a guarantee that you will repay the loan. You may lose your collateral if you don’t pay back your loan.+ read full definition.
Consider all your options before making a decision. Take a moment to read the terms and conditions including how interest is calculated, when payments are due, and what could happen if you miss a payment.
A home equity line of creditLine of credit An account that you set up with a financial institution (often a bank) to borrow money. It lets you borrow what you need, when you need it, up to a certain limit.+ read full definition, or HELOC, is a revolving line of credit secured by the equity in your home. With a HELOC, you can borrow money at lower interest rates compared to unsecured loans like credit card borrowing.
4 key advantages
- Access to cash. A loanLoan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date.+ read full definition secured by your home equity typically gives you access to a large amount of money compared to unsecured loans, like credit cards.
- Competitive rates. You will likely enjoy lower borrowing costs when using your home equity as collateral compared to other options, like credit cards or payday loans.
- Spending flexibility. You can use the money for any purpose including paying bills, renovation, investing, or supporting your business if you are self-employed.
- Stay in your home. You can continue to live in your current home.
4 key disadvantages
- Temptation to overspend. Since there are no restrictions on how you can use the money you borrow, you may face temptation to engage in unnecessary or excessive spending.
- Debt load. While some borrowing options, like HELOCs, may have flexible repayment terms such as interest-only payments, racking up too much debt can negatively impact your financial health.
- Fluctuating interest rates. If you have a variable rate loan, the interest you owe will increase if interest rates rise.
- Real estate risk. Depending on market conditions, the value of your home may decrease along with any equity you may have. You could end up owing more than your home is worth.
HELOCs are callable loans.
Your lenderLender Any person or organization that lends money.+ read full definition, such as a bank or credit unionCredit union A non-profit financial institution whose members own and operate it. Members can borrow money at low interest rates and make deposits. Sometimes large organizations set them up for their members or employees. Offer services similar to a bank such as chequing and savings accounts.+ read full definition, can ask that your HELOC be repaid in full at any time. This could happen if your property value falls significantly or if you have missed repayment deadlines.
Alternatives to HELOCs
The following are some alternatives to HELOCs:
- Mortgage refinancing is renegotiating your existing mortgage to access some of your home equity or to lower your interest rateInterest rate A fee you pay to borrow money. Or, a fee you get to lend it. Often shown as an annual percentage rate, like 5%. Examples: If you get a loan, you pay interest. If you buy a GIC, the bank pays you interest. It uses your money until you need it back.+ read full definition.
- A second mortgage is a second loan you can take out on your home. The loan is secured against your home equity and the interest rate is usually higher than on first mortgages.
- A reverse mortgage is an option for people aged 55 and older. You can borrow up to a certain amount and typically, the amount is only due if the home is sold or if you pass away.