Home Equity vs. a Loan: How to Choose the Best Option

For many Canadian homeowners, their home is the biggest investment they will make in their lifetime. There are several options for loans for homeowners, and in this article we’ll look at two options: an equity mortgage versus a mortgage loan.

Home Equity Mortgage

A home equity mortgage is different than a regular mortgage loan in that it acts more as a line of credit. If you take out an equity mortgage, the bank will agree to lend you a certain amount, but with the equity in your home acting as collateral.

An equity loan will usually have lower interest rates than a line of credit, and these rates will usually be variable, fluctuating with the market.

An equity mortgage does not require a monthly payment like a traditional mortgage loan does. Rather, it works like a credit card where you will need to make a minimum monthly payment. Taking out only what you need rather than having to make a set monthly payment can help homeowners save money on interest rates.

Many homeowners prefer the flexibility of an equity mortgage. However, it can be riskier than a traditional mortgage in that if you cannot make your payments, your home is at risk.

Mortgage Loans

A traditional mortgage loan can come as a fixed rate mortgage or variable rate mortgage. First, you will need to be approved by your lender. Once you have been approved, your mortgage is calculated based on your income, any existing debt, and the price of the property. Mortgage rates are based on the mortgage market.

Whether you have a fixed or variable rate mortgage, you will make the same monthly payment for the duration of your mortgage term. With a variable rate mortgage, the interest rate fluctuates based on the rates set by the bank. A variable rate mortgage, though riskier than a fixed rate, can save homeowners money if interest rates fall, and offer greater flexibility.

The biggest factor in deciding which loan is right for you is your financial planning. A mortgage loan is best for people who want to pay off their mortgage in a specific amount of time and make the same payment each month. A home equity mortgage allows greater flexibility and can be more adaptable, especially if you have unexpected expenses.

There are many complex factors when it comes to choosing the right loan. Consult one of our professional, experienced mortgage agents today to discuss which option is right for you!

source: northwoodmortgage.com

Fixed Rate Mortgages: Should You Choose A 15-Year Or A 30-Year?

Once you’ve decided that you want a fixed rate over a variable rate mortgage, you then have to determine if you want 15 or 30 years. Taking on a loan for 15 years may seem impossible to some people, while others may think that’s just the right amount of time needed to pay it off. Generally, Canadians opt for anywhere from 25 to 30 years for their mortgages, but that doesn’t mean you have to too.

Fixed rate mortgages: 15 years

With 15-year fixed rate mortgages, you have the advantage of paying off the loan faster. Once you’ve paid off your mortgage, you can focus on putting money aside for other things like your retirement, children or grandchildren’s educations, vacations, etc. You’ll also save money on interest since you’ll pay more interest over 30 years than you will over 15. For example, 4% interest on a $200,000 home is $66,288 over the course of 15 years. The same amount of interest on the same property for 30 years is $143,739. Finally, with a 15-year loan you can build up the equity in your home quicker because you’re taking less time to pay off your loan.

Fixed rate mortgages: 30 years 

For fixed rate mortgages at 30 years, you’re looking at increased time to pay back your loan. You’re also looking at a lower monthly payment but, as aforementioned, more interest to pay over the 30 years. However, when you have lower monthly mortgage payments to make, you can save more money to put towards retirement, credit card payments, etc. With a 30-year mortgage you get to keep more cash in your pockets, but you will be putting less towards your mortgage. You can also make extra mortgage payments over the course of the 30 years to reduce the balance, but watch out for prepayment penalties.

Are the monthly payment amounts really that different?

With fixed rate mortgages at 15 years, you’d think that the monthly payments would be double those of 30 years. This isn’t usually the case. Let’s use the same example as before with the $200,000 mortgage at 4% interest. The 30-year monthly payments would be about $950. The same mortgage with the same interest at 15 years would see a monthly payment of about $1,450. That’s less than double with a difference in monthly payments of approximately $500.

Which one is right for you?

When it comes to choosing a 15- or 30-year fixed rate mortgage, you must evaluate your financial situation. Sit down with your mortgage broker and lay everything on the table. Your broker can help you make the decision as to which one is right for you by reviewing your financial situation and explaining in detail what your monthly payments will be, the interest and how you can manage a 15-year vs. a 30-year loan.

source: northwoodmortgage.com

Which Factors Affect Mortgage Rates?

When it comes to mortgage rates in Canada, there are so many factors involved it can be hard to keep track. You’re probably aware that the Bank of Canada is a top player in how mortgage rates are determined, but there’s more to it than the BoC simply deciding what rate to set at any given time. Everyone is looking for a low mortgage rate, but the factors that affect variable mortgage rates are different than those that affect their fixed rate counterparts. Below, we’ll explore the differences.

Variable mortgage rates

A variable rate mortgage is a loan where the interest rate may change during the mortgage’s term. As the borrower, your monthly payment will be same, but if there is a low interest rate, you will still be able to take advantage of it. For example, if the interest rate increases, the amount of your monthly payment that is applied to the mortgage’s principal will decrease. On the other hand, if the interest rate decreases, the amount being applied to the principal will increase.

When it comes to variable mortgage rates, these are determined by the Bank of Canada’s key interest rate (or overnight rate – the rate that banks are able to charge one another to cover their daily transactions) and how they affect the commercial banks’ prime rates. The prime rate is the lowest mortgage rate at which any bank’s best customers can borrow money. So, when the BoC increases their rate, which they do often to fight inflation, the rates on variable mortgages go up as well.

Fixed mortgage rates

A fixed rate mortgage is a loan in which the mortgage rate remains the same throughout the term. Unlike variable rate mortgages, fixed rate mortgages do not depend on the Bank of Canada to set their rates. In a fixed rate mortgage, the rates are affected by the bond market. The bond market is the commercial fiscal market where banks and other financial institutions can buy and sell securities in the form of bonds. The interest rates in the bond market move up and down more frequently than the prime rate. This is due to the sensitivity of the bond market and how it responds to market fluctuations.

Does the time of year affect mortgage rates?

There is no perfect time of year to get a low mortgage rate. The Bank of Canada sets their rates eight times yearly: late January, early March, mid-April, late May, mid-July, early September, mid-October and early December.

source: northwoodmortgage.com