If you have mounting debts then chances are many well meaning friends and relatives have advised you to use the funds you invested in your home to become debt free. Using home equity loans to consolidate debts is a solution that many debt ridden people opt for. Before you sign up for a home equity loan Toronto to get rid of all your mounting debts you should understand the pitfalls of these loans too.

Your home is at risk

The biggest risk with your home equity loan Toronto is that it creates a lien on your home. This kind of loan is a collateralized loan that uses your home as collateral. In the event that you are unable to repay the loan, the lender can lay claim to your home. He can sell it and use the proceeds to make good your dues. Else he can repossess and use it in whichever way he likes. For you the result is disastrous either way because you lose your most expensive and valuable asset.

More expensive than first mortgages

The home equity loan is typically taken as a second mortgage. This makes your home equity lender a second priority creditor. In case you default, his claim will be fulfilled only after that of the primary lender. Home values are not predictable and they may rise or fall in the future. If home values decline in future, then the home equity lender is at greater risk because not enough may be left over after the sale of the home to pay back his loan completely. This greater risk makes the lender more wary when offering home equity loans. That is why these loans may be more expensive than primary mortgages even though your home is being used as collateral.

Excess borrowing

This is a risk that has arisen fairly recently when 125% loans began to make an appearance in the market. A 125% loan is one that actually lends you more money than your home is worth at present. The idea behind this is that your home’s value will rise in future to exceed the 125% level.

But, it is impossible to predict future home values with any degree of accuracy. What if home values in Toronto actually dip in future as it happened during the recession? In this case, you are stuck paying off a loan amount that is higher than what you can actually gain from selling your home. Typically, home values decline when the economy slows down. In such conditions it is also likely that you may see a cut in your salary. The combination of factors will serve to make your home equity loan an unmanageable burden on your already weakened finances. It is best to base your home value on current prices and borrow only a portion of it so that you have enough leeway in case of future fall in prices.

Make sure your decision to take a home equity loan Toronto is well thought out and that you fully comprehended the risks before you sign up for one. This will ensure that there is minimum risk on your home and you still have access to funds that are large enough to meet major critical expenses such as medical treatments and college fees.

Author Bio: For more information on home equity line of credit or a second mortgage, speak with a professional mortgage broker at Canadian Mortgages Inc.

Category: Finances
Keywords: finance, mortgage, home equity line of credit, second mortgage, home equity loan,