Home Equity 101: Unlocking Potential Value Through Refinancing or HELOCs

November 29, 2024

Homeownership can be one of the most effective ways to build wealth in Canada. Over time, as you pay down your mortgage and your property appreciates, you build up equity—a valuable financial asset that can be used strategically to support other financial goals. Here, we explore two common ways to access your home equity: refinancing and a Home Equity Line of Credit (HELOC). Learn more.

1. Understanding Home Equity

Home equity is the portion of your home that you truly own outright, calculated by subtracting your remaining mortgage balance from the current market value of your property. For example, if your home is worth $600,000 and you have $300,000 left on your mortgage, your home equity is $300,000.

2. Why Access Your Home Equity?

Canadians choose to access home equity for various reasons, such as funding home renovations, consolidating debt, paying for education, or investing. Using your home equity can be a smart financial move because home loan rates are typically lower than other forms of credit.

3. Option 1: Refinancing Your Mortgage

Refinancing allows you to renegotiate your mortgage to access up to 80% of your home’s appraised value. Here’s what to keep in mind:

Higher Borrowing Limit: Unlike a HELOC, refinancing may allow you to take out a larger sum.
Fixed or Variable Rates: Refinancing lets you choose between fixed or variable rates, potentially securing a lower interest rate than your current mortgage.
Costs to Consider: If you’re breaking your current mortgage term early, you’ll likely incur a prepayment penalty, so weigh this cost against the benefits of refinancing.

4. Option 2: Home Equity Line of Credit (HELOC)

A HELOC is a flexible option that lets you borrow against your home equity as needed, similar to a credit line. Here’s how it works:

Draw As You Go: A HELOC allows you to borrow and repay funds as needed, with a credit limit based on your available equity.
Interest-Only Payments: HELOCs typically require interest-only payments on the amount you draw, making it an affordable option if you only need periodic access to funds.
Variable Rates: Most HELOCs have variable interest rates, which means your rate could change over time.

5. Comparing Refinancing and HELOCs

Choosing between refinancing and a HELOC depends on your financial goals and cash flow needs:

For One-Time Large Expenses: Refinancing may be more suitable, as it provides a lump sum and allows you to lock in a rate.
For Ongoing Access: If you need flexible, ongoing access to funds, a HELOC might be a better fit, allowing you to borrow only what you need.

6. Working with a Mortgage Broker to Access Your Equity

Navigating the different options for accessing your home equity can be complex. A mortgage broker can help you evaluate refinancing and HELOC options, negotiate terms, and determine the best choice based on your financial situation.

Whether through refinancing or a HELOC, accessing your home equity can be a powerful tool for managing finances and achieving long-term goals. By understanding your options and consulting with a knowledgeable mortgage professional, you can make informed choices that help you unlock the full potential of your home’s value.