It's your home, stop raiding the piggy bank

Most Canadians dream of owning their homes free and clear someday, which will become part of their retirement nest egg. Yet, for many, this dream gets farther and farther from reality as they break into their home equity piggy banks.

A recent trend we are seeing is that many homeowners, who have excellent credit, are starting to take equity out of their homes over the last few years via cash-out refinances or home equity loans. There is nothing wrong with this technique per se, however, now, with larger mortgages and often less equity, these people may face a longer and more difficult path to debt-free home ownership.

Before you decide to borrow against your hard earned home equity, consider the following:

• Are you using your home equity for something that actually adds value (equity) to your home, such as a remodeling project or a swimming pool or for something important in your life such as a child's education or unexpected medical bills? This can be a prudent way to finance such expenditures. Home equity loan rates can be attractive. However, if you are using your home equity to finance vacations or pay your bills, think again, as you may be overextending yourself. If you use your home for investment purposes, your interest can become tax deductable, however, you have to fully understand the risks of this type of strategy before your proceed.
• Are you using a fixed rate home equity loan with the shortest term you can easily handle? Adjustable or floating rates may make sense for the financially well off (and financially sophisticated) but for many people, a fixed rate and a fixed monthly payment avoid future payment shock and is the better alternative. Paying off your loan sooner obviously builds your home equity more quickly. Think of it as forced savings.
• Cash out refinances can make sense if you are improving your overall mortgage terms and using the cash for an appropriate purpose. Again, consider shortening your loan term if possible.
• Are you thinking about a home equity line of credit? This product is marketed like a credit card with adjustable teaser rates, ease of use and other incentives, encouraging you to use your home equity for just about anything with long repayment periods. Be careful. Having these types of loans in place may be prudent for certain purposes (for example, a future emergency) if you can be disciplined about not normally using it and pay it down quickly if you do.
• If you have excellent credit, you may qualify for an attractively priced unsecured line of credit that doesn't require pledging the equity in your home. This type of loan, offers highly competitive, with both fixed and floating interest rates and an ease of use not available with mortgage products.

If you are looking to re-finance your home for any reason, make sure that you speak with our office first. IPC has a number of options available to you that can help you save money on fees and interest rates when arranging a line of credit or other types of loans.