“Potential buyers may not have the cash needed to pay for all or part of an asset such as a second home,” says Maxine Crawford, a mortgage broker with Premiere Mortgage Centre in Toronto. “They may have their money tied up in investments that they cannot or do not want to cash in. However, by leveraging the equity in a home, a buyer can use an existing asset as collateral to purchase all or part of another significant asset, such as a vacation home.”
What is home equity?
Equity is the difference between the present value of your property and the remaining balance of your mortgage. It refers back to the portion of your property’s value that you just actually own.
You can calculate the equity in your property by subtracting the present market value of the property from the outstanding mortgage payments. For example, if your property has an appraised value of $800,000 and you might have $300,000 of mortgage payments left, you might have $500,000 in equity. If you might have already paid off your mortgage in full, your equity is the same as the present market value of the house.
What is a house equity loan?
With a house equity loan (sometimes called a second mortgage), a home-owner borrows money using the equity they’ve built up of their home as collateral for the brand new loan. The equity is the difference between the present market value of the property and the remaining balance of the mortgage. Typically, homeowners can borrow as much as 80% of the worth of their property, including the remaining balance of the primary mortgage.
How to make use of equity to purchase a second home
To buy a second property with home equity, you borrow money from a lender against the equity—that’s, you employ the equity as leverage or collateral. There are several ways a home-owner can do that.
Mortgage refinancing: When you refinance your mortgage, you replace your existing mortgage with a brand new one with different terms, either along with your current lender or with one other lender (you could have to pay a prepayment penalty when switching lenders, unless your mortgage was up for renewal). When you refinance, you possibly can get a mortgage for as much as 80% of the worth of your property. Refinancing your mortgage gives you the capital it’s essential buy a second home.
Home Equity Line of Credit (HELOC): A HELOC works like a conventional line of credit, except that your property is used as collateral. You can access as much as 65% of the worth of your property. Interest rates on HELOCs are typically higher than mortgage rates. However, you simply withdraw the cash while you need it, and also you only pay interest on the quantity you withdraw, unlike with a second mortgage or reverse mortgage. Below are the best HELOC rates available today.
2. Mortgage: This is while you take out a further loan against your property. Typically, you possibly can stand up to 80% of the appraised value of your property minus the balance of your first mortgage. Second mortgages may be harder to get because in the event you default in your payments and your property is sold, the second mortgage lender is not going to receive any money until the primary mortgage lender pays off their debt. To offset this extra risk for the second mortgage lender, rates of interest on second mortgages are inclined to be higher than on first mortgages.
Reverse mortgage: A reverse mortgage is just available to homeowners age 55 and older and permits you to borrow as much as 55% of your property’s equity, depending in your age and the worth of the property. Interest rates may be higher than a conventional mortgage, and the loan have to be repaid in the event you move or die. You do not have to make regular payments on a reverse mortgage, but interest continues to accrue until the loan is paid off.
