Borrowing against home equity

What is home equity

Home equity is the portion of your home that you own. You may need to get a home appraisal to determine the value of your home.

Home equity is the difference between your home’s appraised value and how much you owe on:

• your mortgage
• your home equity line of credit (HELOC)
• other loans and lines of credit secured by your home

For example, suppose your home is worth $250,000, and your mortgage balance is $150,000. You have $100,000 ($250,000 - $150,000) in home equity.

Your home equity may go up:

• as you pay down your mortgage
• as you pay down your HELOC
• as you pay down your other loans and lines of credit secured by your home
• if the value of your home increases

Financial institutions may use the amount of home equity you have to determine how much money you may borrow.

How borrowing on home equity works

Your financial institution may allow you to borrow money secured against your home equity. Financial institutions may also call this “equity release.” You may usually borrow up to 80% of your home's value.

For example, suppose your home is worth $250,000. The maximum amount you can borrow on home equity is $200,000 (80% of $250,000).

Suppose you also owe $150,000 on your mortgage. The maximum remaining amount you may borrow is $50,000 ($200,000 - $150,000).

Your home acts as security for the equity you borrow.

This means:

• you may usually get a lower interest rate than with other types of loans
• you may face serious consequences, like the foreclosure of your home, if you can’t pay back the money you borrow

You may need to pay administrative fees which include:

• appraisal fees
• title search fees
• title insurance fees
• legal fees

You may have to pay a new mortgage loan insurance premium. Your lender may also have to change the terms of your original mortgage agreement.

Home equity products and services

Many financial institutions offer financial products and services based on home equity. For more information about the home equity financing options available to you, contact your financial institution.

Learn about how to choose products and services that are right for you.

Second mortgages

A second mortgage is a second loan that you take on your home. It has the same features as a mortgage.

While you pay off your second mortgage, you also need to continue to pay off your first mortgage. Interest rates on second mortgages are usually higher than on first mortgages because they are riskier for lenders.

Learn more about mortgages.

Home equity lines of credit (HELOC)

A HELOC works much like a regular line of credit. You may borrow up to 65% of your home's value. You can borrow money whenever you want, up to the credit limit. You pay it back and borrow again.

Learn more about home equity lines of credit.

Reverse mortgages

A reverse mortgage usually allows you to borrow up to 55% of the appraised value of your home.

To qualify for a reverse mortgage, you must:

• be a homeowner
• usually be aged 55 years or older

With a reverse mortgage, you accumulate interest cost. The interest rate is typically higher than with a HELOC or a mortgage. You don’t need to make any payments on a reverse mortgage until the loan is due.

You pay back your loan and the accumulated interest when:

• you move out of your home
• you sell your home
• the last borrower dies
• you default on your reverse mortgage

Learn more about reverse mortgages.

Home equity Loans

A home equity loan is different from a home equity line of credit. With this type of loan, you’re given a one-time lump sum payment. This amount may be up to 80% of your home’s value.

You pay interest on the total amount. Once you pay back the amount you owe, you can’t borrow it again.

You must repay fixed amounts on a fixed term and schedule. Your payments cover principal and interest.

Borrowing the amounts you prepaid

You may have made additional payments during your current mortgage term. Financial institutions usually call this a "prepayment" or "lump-sum payment".

If that’s the case, your financial institution may allow you to re-borrow the amount you prepaid. Your financial institution will typically add this amount to your outstanding mortgage balance. This will increase your interest costs.

Learn more about lump-sum payments.

Comparing your options

Decide which type of loan best suits your needs. Compare the different features of each option.

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Related links

• What to consider before borrowing money
• Managing your money when interest rates rise
• Lines of credit
• Infographic: Pay more than monthly interest on your home equity line of credit and save