Dwight@RateSupermarket.ca
Staff writer

Jason Zuckerman, a mortgage agent with Multi-Prets, provides insight into the home equity loan process.

Generally, the largest debt a homeowner will ever face is their mortgage.

With proper budgeting, a steady income, and fiscal responsibility, making each and every mortgage payment on time and in full is definitely doable.

But life certainly isn’t so easy, and there are always plenty of other debt in people’s lives, including student and car loans, home renovations and repairs, and the dreaded credit card debt, which often carries an interest rate of 15% to 20%. When your dollars are already stretched to their limits, it can be difficult to even pay the interest on these various debts each month.

But, as a homeowner, you’re in a unique lending position, because you can – with proper approvals – borrow against the equity of your home, by taking out a home equity loan.

A home equity loan is based on the value of your home compared to what balance you owe on the mortgage. Being approved for a home equity loan is not as difficult as you may think, because the loan amount is based on the value of your home. That means lenders (usually banks) are comfortable adding to your current mortgage because they are safeguarded by the fact that if, for some reason, you default on your mortgage, it can recoup its losses through the seizure and sale of your home.

“In this economic crisis, people take (home equity loans) because they are looking for equity any way they can to pay off existing debts,” said Jason Zuckerman, a mortgage agent with Multi-Prets.

The primary bonus of a home equity loan is its debt consolidation capabilities. Instead of paying regular mortgage payments at a low interest rate – say 5% over five years, which is about the norm right now – and being saddled with enormous credit card debt at the aforementioned 15% to 20% interest, a home equity loan will allow you to tackle your most pressing debt – in this case the credit cards – and clear them off your books. The amount you receive will be added to your re-negotiated mortgage term and rate, while actually lowering your monthly payments.

 

Before Debt Consolidation
Existing Mortgage
Property Value	$170000
Mortgage Balance	$130000
Interest Rate	8.20%
Term	5 year
Monthly Payments
Credit Cards ($8000)	$250.00
Other Debt ($3000)	$150.00
Mortgage	$1021.43
Total Payments	$1421.43

 

After Debt Consolidation
New mortgage
Property Value	$170000
Mortgage Balance	$141000
Interest Rate	5.75%
Term	5 year
New Monthly Payments
Credit Cards ($0)	$0.00
Debt ($0)	$0.00
One Mortgage Payment	$898.81
Total Savings	$522.52

You can see how eliminating the secondary debt in this example will save this person $522.52 each month, by taking out an $11,000 home equity loan.

Mr. Zuckerman said eliminating outstanding debts is important to long-term financial health, even if it means a larger mortgage down the road.

“The important factor in these transactions is that the clients’ debts are paid off and to increase their credit score so that they can acquire a first mortgage at a mainstream financial institution,” he said.

How do you obtain a home equity loan?

The best way of going about getting a home equity loan is through a mortgage broker.

“Since I deal with a lot of clients who have poor credit or past bankruptcy, these tend to be the only option available,” Mr. Zuckerman said.

“Within a few hours I can give the client a good idea whether or not they will be approved for a home equity loan. It is important to work swiftly with these clients since time is a factor. Each day is another day that their debt accumulates as a result of high interest rates.

“A full financial audit is not necessary. Once I have taken an application and find out some basic information, I check the clients’ credit and calculate whether or not the deal can work. At this time, I speak to my lenders and give them the specifics about the deal and sell it to them. Lenders generally require the same documentation, which I collect on their behalf. Within 24 to 48 hours I should have an approval and a notary date,” Mr. Zuckerman said.

Advantages of home equity loans

• You get cash in your hands to do with what you see fit – buy a new car, renovate your house, clear up other outstanding debts
• Tend to be the only option available to poor credit or a past bankruptcy
• Chances are good your monthly payments will actually go down, because you’re most likely using your home equity loan to consolidate your debts into one mortgage payment, eliminating the high interest credit card debts
• Since they’re tied to your biggest asset – your home – home equity loans can be spread out over the lifespan of your mortgage, which is often up to 25 years
• Tax deductions are also available. If you put the proceeds towards an investment and make a return on that investment, you can deduct the interest paid on your Line of Credit or Home Equity Loan against this return (but be sure to consult a tax specialist for advice on this).
• Can often be completed with 48 hours

Disadvantages of home equity loans

• You are risking your home by taking a second mortgage. If you can’t pay the loan back, a home equity loan can be catastrophic. Make sure that your intended use of funds is worth the risk you’re taking
• They differ from a home equity line of credit, because once you use the money you have loaned it cannot be accessed again

With a home equity line of credit you can borrow against your home and once it’s paid back you can access it again

• When you borrow against your home you lose equity or ownership in the home, putting more back in the hands of your lender
• There are also fees associated with home equity loans, which are similar to ones you encountered when you purchased your home, including prepayment and standard mortgage fees
• Home equity loans usually have to be taken against your principle residence, not any rental properties you may own

Questions or comments? Please email Dwight@RateSupermarket.ca

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