Personal Loans vs Home Equity Loans

When thinking of borrowing, some will consider leveraging the equity of their home for financial matters from a home equity loan (or secured loan) as one of the first options that may come to mind for some. 

Also referred to as a second mortgage, a home equity loan can allow you to borrow against the current value of your home. Since this type of loan requires your home as collateral, you should only use this option if you are confident in your ability to make the payments. 

Many others will consider personal loans as the right option to borrow. An unsecured personal loan is a faster way to get your hands on funds quickly. When comparing the two options, you will notice they differ considerably. 

How Much Can I Borrow With A Home Equity Loan?

Determining how much you might be able to borrow with a home equity loan is not difficult. You would start by figuring out what the current market value of your home is. Try using an online home value estimator or compare recent sold prices for comparable homes in your area. Another option would be to get a professional home appraisal for a more accurate estimate. 

After you have figured out your home market value, you would determine 80% of that amount. Then deduct the remaining balance on your mortgage from your estimated home value to arrive at what kind of equity your home has available to borrow against. 

Here’s an example based on a home worth $800,000 in Canada with $400,000 still owed on the mortgage. 

For 80% of a home worth with an $800,000 market value, you would have $640,000. 

Now take the home value at 80% (640,000) and subtract the mortgage owed (400,000). 

This suggests you might be eligible to borrow up to $240,000 for a home equity loan.

To be eligible for a home equity loan, in addition to owning sufficient equity in your home, you should have an acceptable income and fair to good credit.

How Much Can I Borrow With A Personal Loan

The amount available to you for personal loans will depend on your financial history, debt and credit score, along with whether you choose short or longer repayment terms

If you do not qualify for a personal loan, there is an alternative known as installment loans that are very similar but have higher interest rates or APR. Personal loans are most suited to those with good to excellent credit scores (720+) where installment loans are a fit for those that might have a fair credit score of 600+ or better.

RELATED: What to Know About Installment Loans

Home Equity Loans vs HELOC

If you were thinking that a HELOC (Home Equity Line of Credit) and a Home Equity Loan are the same thing, you would be mistaken.

While a HELOC allows you to borrow based on equity you have built up in your home, there are some noticeable differences in what they might provide. The maximum usable amount of the equity in your home with a HELOC is 65% and is a line of credit (like a credit card) and can be more suitable, depending on your needs. If you were planning to do several home renovations but not all at once, a HELOC could make more sense. 

You should also know that a HELOC usually has adjustable rates, meaning that your monthly payments can increase if interest rates rise. 

RELATED: Personal Loans vs Line of Credit 

Which Loan Should I Choose?

Every situation is different so we will try to help by providing other insights to consider for choosing between a personal loan or a home equity loan.

Personal loans are processed faster than home equity loans on average. A home equity loan can take from 2 to 6 weeks, where a personal loan might take 1 to 2 weeks to process, depending on the lender. Submitting the required information accurately can help to avoid delays. 

A home equity loan has some advantages, like low rates and tax incentives. The repayment schedule (installments) of a home equity loan usually means lower monthly payments due to duration, not just rates, which can make it more affordable but you carry the debt longer.

It’s worth noting that the home equity loan process can likely has fees involved, from appraisal to legal fees. 

The amount you can borrow with a personal loan is related to your creditworthiness, finance history, debt, credit score and personal finances. Where a home equity loan is more related to the equity built and available.

For newer homeowners, there might not be enough equity built to be eligible for home equity loans, which may make a personal loan a more viable option. 

Other Alternatives to Home Equity Loans 

When you have collateral like a home, you have a few ways to borrow. This type of secured loan is considered less risk to lenders and creates some options for you.

Reverse mortgage – for those that are 55 years of age and up, this option can allow you to borrow up to 55% of your home’s equity.

Cash-out refinance mortgage – this would be where you refinance your existing mortgage for more than owed and ‘cash out’ the difference between the existing and new mortgage. 

Blended mortgage – this is where you combine the rate of an existing mortgage with a new one and can sometimes help you get a better mortgage rate.

RELATED: What Credit Score Do You Need For a Personal Loan

Depending on the amount, some may find credit cards an acceptable alternative as well.

It’s important to be aware of any terms with your current mortgage and how things like refinancing might trigger penalties or fees, such as an appraisal or pre-payment penalties.

Not all Canadian banks offer home equity loans, but most have personal loans. A home equity loan uses your home as collateral, which can put it at risk if you had trouble making the payments. It’s for this reason that some choose an unsecured personal loan. 

It wouldn’t be possible to say that one option is better than the other since there are so many variables and the best way to decide is by weighing the pros and cons between personal loans and home equity loans to help you decide. Whether you’re looking to deal with debt or to   borrow for home renovations it doesn’t matter so long as you’re doing so for the right reasons.

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