What is the difference between a Home Line Plan credit and an equity take out ? Is there an advantage of one over the other ?
A Home Line Plan is a line of credit set up using the equity in your home as security. This leaves your existing first mortgage in place and is basically a second mortgage on the house. It normally functions as a line of credit that you can use as much or as little as you like. Monthly payments are normally interest only and the interest rate can be higher than a normal first mortgage. Normally an equity take out refinances the first mortgage to the loan to value ratio ie up to 80% of the appraised value and gives you the cash over and above the existing first mortgage in cash to do with what you wish. Over the years many of my customers have done equity take outs (As the interest rates on first mortgages have been so low and normally the cheapest money you can borrow.) They have used the money for investment purposes, renovations, put their children through collage, start a business or simply for retirement purposes. There are some things to consider before paying out a first mortgage.
1. Lenders always front load the interest. By this I mean on a 25 year mortgage you pay mainly interest the first years of the mortgage let us assume you have $100,000 left owing on your mortgage with 10 years left if your monthly payments are $500 before taxes you have 10 years x 12 months = 120 months x $500 = $60,000 left to pay off the mortgage. (This may vary should your mortgage come up for renewal during the 10 years at a higher rate but this is essentially how it works.)
2. Now if you refinance that existing $100,000 as part of an equity take out back to 25 years and the $100,000 portion represents $500 per month you have 25 years x 12 months = 300 months x $500 = $150,000 left to pay off that $100,000 portion you have included in your equity take out.
The difference $150,000 vs $60,000 = $90,000
Most people never consider this and lenders seldom explain this.(Remember they sell money.) Basically the banks/ lenders charge you interest every year on the unpaid balance and that's why they make so much profit. I always advise my customers to raise their payments and shorten the amortization period so the lenders do not make as much. Mortgages are designed with blended monthly payments of principle and interest and the banks/lenders take their interest first.
Eg $100,000 mortgage @4. 5% = $553.47 per month principle and interest. x 12 months = $6641.64 Total payments the first year.
The interest on the $100,000 for that year at 4.5% is $4500.00
$6641.64 - $4500.00 = $2141.64
At the end of the first year you have paid $2141.64 on the principle leaving $97858.36 owing. The bank/lender has charged you $4500.00 for the use of that money for a year.
To further explain
$100,000 amortized over 25 years at 4.5% = $553.47 per month x 300 months = $166,041.00 Total pay back. (Assuming no rate increases.)
$100,000 amortized over 10 years at 4.5%= $1034.38 per month x 120 months = $124,125.60 Total pay back. (Again assuming no rate increases.)
$166,041.00 - $124,125.60 = $41,915.40 Accomplished by increasing the monthly payment and shortening the amortization period.
Now you wonder why would anyone buy a home ? In Canada when you sell your home any gain in value from the time you bought it until the time you sell it is tax free. Income property or rental property is subject to Capital Gains tax where half your gain is taxable. Real estate as in any commodity does fluctuate in value subject to supply and demand but historically and consistently values have gone up. So home ownership builds equity that is tax free over time while renting doesn't and as an investor rental properties build equity of which half is tax free and the tenants pay down the debt so in both cases real estate has been and I believe will always be a great investment although both (Being a home owner and investor) does require investments in time and money to earn a return.