Learn About Home Equity Loans

What is Home Equity?

Equity is typically defined as the difference between the appraised value (what your home is worth) and how much of your mortgage you have left to pay. Essentially, equity is the amount you have paid toward your home. To understand what home equity is, consider this example:
  • The appraised value of your home is $150,000
  • To date, you have made $20,000(less interest) in payments toward your mortgage, including your down payment
  • The balance owed on your mortgage is $130,000
  • Therefore, appraised value ($150,000) – balance owed ($130,000) = amount of equity ($20,000)

Over time, the value of your home may increase, which could change your equity amount. If you have made home improvements or your neighborhood schools improve, the value of your real estate may improve. Then your home could be appraised at a higher amount than what it was originally purchased for, which increases your equity. Should you experience this situation, you can use the same equity calculation – appraised value minus the amount you owe – to estimate your available equity amount.

Many people find that one of the easiest and most affordable ways to access money is through the equity that they have accumulated in their home. This is a very popular option, especially when you have an excellent first mortgage in place.

Using home equity to your advantage

Canadians purchase homes for a variety of reasons. Some want the stability of owning their own home, while others also look at home ownership as an investment vehicle. No matter what the reason, the truth is that home ownership has proven itself to be a good stable investment over time, and one which many Canadians are profiting from.

While many people have chosen to purchase their first home during these times of lower interest rates, there has also been a large movement to refinance home loans and pull out equity for home improvements, investments, college expenses, and even high interest debt consolidation. Canadians have been borrowing against their home’s equity in record numbers, taking out billions of dollars in cash each year.

In years past, many saw their homes as a shelter of safety, yet today, they are more than ever before, willing to borrow against the equity owned in their homes to further their investment portfolios, get out of debt, send their children to university, make improvements to their home, or even boost their RRSP contributions. Where home equity was once sat upon, today it is often used to one’s advantage.

While removing equity from your home can be a good idea, you should do so with caution and fully understand the benefits and possible risks. The best thing you can do is to consult a licensed mortgage professional and financial planner to discuss opportunities to make your home’s equity work for you.