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First, let’s clear something up: HELOC (home equity line of credit) and lump sum equity loans are both considered second mortgages in Canada. They function in entirely different ways, however, granting the borrower a different set of advantages and disadvantages as they move forward. In this article, we will explain the differences between HELOC and lump sum equity loans to help you make the right decision for your home and for your future.
The Difference Between a HELOC and a Lump Sum Equity Loan
“HELOC” stands for “home equity line of credit.” This type of second mortgage enables homeowners to access their home equity as it’s needed. Essentially, you can withdraw these funds as needed so that you can tackle different expenses as they arise – whatever they may be.
A lump sum equity grants access to the same equity, but on different terms. Instead of withdrawing the money as needed, you will be given the funds all at once, in full.
When Should I Choose a HELOC?
Home equity lines of credit are highly desirable among homeowners who intend to make a series of renovations and repairs around the home. This is because doing so helps to drive up the asking price of the home when the owner eventually sells it. If you’re savvy with your HELOC funds, you can make back what you borrowed when someone purchases the renovated property.
If you are unsure as to how much of your equity you’ll need to access, a HELOC is a safer bet that can help keep you from getting into financial trouble.
When Should I Choose a Lump Sum Equity Loan?
Lump sum home equity loans are considered the standard option for homeowners looking to take out a second mortgage on their property. These allow the homeowner to make large, one-time investments toward their future and other expenses that could be compromising their financial security.
One of the most common reasons for people to choose a lump sum loan is to consolidate existing, high-interest, unsecured debts. This includes credit card debts, which often carry a higher interest rate than a lump sum equity loan would. This method has helped individuals to boost their credit and even save themselves and their families from financial ruin.
It is also not uncommon for homeowners to use these loans to pay for renovations, as well, but this is only when they know exactly what they will need to be spending – and when. Another common investment made with these funds is toward education, especially if the individual knows that they will be receiving a substantial rise in pay after they’ve achieved a degree of education.
Which is Right for Me?
In all, it depends on what you intend to use your second mortgage for. For singular, large expenses, a lump sum equity loan is pretty much the standard. If you have ongoing projects or expenses that you want to use your equity to tackle, a HELOC is an invaluable asset that may be available to you.
If you struggle to monitor your finances reliably each month, a HELOC can be a bit more troublesome to keep track of. With a lump sum loan, however, you are paying a flat amount in principal and interest each and every month, making it much easier to budget for.
If you need a second mortgage in Canada visit https://askross.ca/second-mortgages-toronto-and-gta/ to get more information.