Advantages and disadvantages of borrowing against the value of your home.
Make sure you know about all the costs along with the advantages and disadvantages of borrowing against the value of your home. You can get a home equity loan or a line of credit if you've paid off some of your mortgage. If you're over age 55, you're also eligible to apply for a reverse mortgage.
5 advantages of borrowing against your home
Frees up cash – Invest the money, buy an annuity to create monthly income or use it to cover expenses.
Keeps cost of borrowing low – Interest rates on home equity loans and lines of credit are lower than for other kinds of loans.
Creates tax break – You can deduct the interest on the loan from your taxes if you invest the money you borrow (this tax break can balance out any tax you may pay on unsheltered investments).
Allows you to stay in your home – Continue to live in a home you love in an area you like.
Keeps equity – You have ownership in an asset that may go up in value and add to your estate.
The best strategy is to find ways to cut your expenses, so that you can avoid borrowing in the first place.
5 disadvantages of borrowing against your home
Requires monthly payments – The minimum monthly payment may not be large enough to pay back any of your principal. You may only be paying the interest.
Does not eliminate costs – You still have to pay property taxes, maintenance costs and home insurance.
Adds costs – To get the loan, you may have to pay appraisal fees, application fees and legal fees.
Increased cost of borrowing – If you have a variable rate loan or line of credit, your interest cost will increase if interest rates go up.
Creates tax cost – You may have to pay tax on any unsheltered investments you make using the money you borrowed.
Home equity lines of credit
As of April 18, 2011, you can no longer get government-backed mortgage insurance on most lines of credit secured by your home. As with credit cards, you make minimum monthly payments on the amount you borrow. You do not have to pay off the full balance each month. But in many cases, the interest rate is not fixed. So, if interest rates rise, your minimum payment will go up. If you can't make your payment, you won't be covered.
Most home equity loans are used to consolidate other debt or to spend on something other than housing. The new government rules aim to discourage Canadians from taking on too much debt.
Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca
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