Pitfalls of Home Equity Loans
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.