In this extreme time of financial stress, people are looking for relief. Home equity loans might be the answer, but there are many costs associated with it and you must weigh all your options before committing to one. I would like to cover the basics in this article so you are not at the mercy of the first lender you call. And remember if they are willing to take your application today, they will take it next week. Don’t get pressured into moving faster than you are comfortable with.
A home equity loan requires the lender to put their name on your title. This means lawyers are involved. The borrower is responsible for all legal costs and a $2,000 budget is probably average. The lender and the mortgage broker will charge a fee. Sometimes the mortgage broker fee is inside of the lender fee as the lender often give half of their fee to the broker for compensation. Some lender charges admin fees, inspection fees and various fees for arranging this loan. The key is to ask for the total fees. What they call it is not as important.
Currently, if you are in a large city in BC the total fee should be around 2-3% of the loan for a first mortgage and 3 – 5% for a second mortgage. It really should not be higher unless your situation is extreme. For example, you quit your job to work on your new business for the last two years. You ran out of money and stopped paying your bills a year ago so your credit is terrible and you have no money.
In terms of rate, it is harder to pin down because so many factors go into deciding it. Credit worthiness, location, type of property, the amount of equity left after the loans and the condition of the property all play into it. However currently a good rate for a home equity loan would be 6.5% for a first and 8% for a second.
So, the minimal setup cost for a $100,000 home equity loan would be as follows:
Lender fee: $1,000
Broker fee: $1,000
Legal fee: $2,000
Appraisal: $400
TOTAL: $4,400
So, the initial cost is substantial and you wouldn’t go this route if you are borrowing a small amount of money.
Depending on your situation consider mortgage payment deferral for 6 months, home equity line of credit, refinance of your mortgage or a personal line of credit.
Also consider the various programs offered by the Provincial and Federal Government:
https://www2.gov.bc.ca/gov/content/safety/emergency-preparedness-response-recovery/covid-19-provincial-support
https://www.canada.ca/en/department-finance/economic-response-plan.html
If you need help deciding whether a home equity loan makes sense for you, feel free to give me a call. John at 604-831-4437.