If you have owned a house for a few years, it is very likely that this house has acquired residual value. In addition, if the price of the house has increased since purchase, then it is almost certain that the house has acquired a significant residual value. When the house has a residual value, the owner can use it to borrow money. There are several terms for this practice: home equity loan, home equity loan, second mortgage, and so on. All of these terms mean the same thing: use the residual value of your home to get the financing you need.
This loan can be used for anything you want, many people take it to pay off debts with high interest rates. This is a controversial practice because financial specialists do not consider it a good decision.
Since everyone’s financial situation is different, what you do with the loan you get does not affect anyone except you. But, let us present to you all the information that we consider important ( when is the right time to use the residual value?) So that you make the best choice.
What is the residual value?
Residual value is the value of the house you actually own or have already paid back. If, like the majority of people, you have taken a mortgage to buy the house, you do not own the house completely until you repay the mortgage in full.
That’s how you can calculate the residual value you have at this time:
Value of the house – Mortgage balance remaining = The portion of the house you own
It is important to keep in mind that not all creditors will lend you the full amount of your residual value. Other factors will also influence the total amount of the loan you will be able to obtain. The best solution is of course to deal directly with the creditor of your mortgage.
How to repay debts with the residual value
Step 1: Calculate the total amount of debt
Usually, if a person uses the residual value to pay their debts, it means that they have several debts. The most common debt is that on credit cards, which is often accompanied by high interest rates. The first step is to calculate the total amount of debt: car loan, student loan, credit card, etc. It is also important to look at interest rates and find debts that may have lower interest rates than a home equity loan.
Step 2: Calculate the residual value you have
With the information provided above, calculate the residual value you have. In order to know the mortgage amount you have refunded, you can view your statement of account. Use the formula that you have been given.
Know that when you apply for a loan on the equity of the house, the creditor will surely redo the calculation.
Step 3: Choose the best option
As discussed above, there are several ways to tap into your residual value:
- Mortgage line of credit (or line of credit earned on real estate)
- Home equity loan
- Second Mortgage ( learn how to apply for a second mortgage in Canada)
With these choices, it’s up to you to see what solutions can better repay your other debts. Whatever solution you choose, it should not affect your budget.
Step 4: Pay off your debts
Once approved for home equity loan, you can start paying off your debts. It is important to note that now you will no longer have credit card debt. But, remember, you now have two mortgages.
The benefits of using residual value to pay off debts
- Interest rates are usually lower than on other loans
- Payment plans are flexible and often tailored to your needs
- You will no longer have to monitor all your debts and the respective payment dates
The disadvantages of using residual value to repay debts
- You must have some residual value to be approved for this loan
- In the case of a second mortgage, there are certain fees that come into play
- If you want a second mortgage, we advise you to do business with a private creditor, because the banking process is often complicated and does not bear fruit.