Unlocking your U.S. home equity: How and why?

Many Canadians choose to buy homes over the border in the U.S. for the leisure and lifestyle opportunities they present, but your U.S. home is so much more than just a place to escape the cold winter. As you pay off your mortgage and build equity, your home can also become a powerful financial tool.

If you have owned a home in the U.S. for more than a few years there is a good chance your home has appreciated a decent amount of equity, especially given the rapid price growth seen since 2020. If you haven’t taken advantage of your home equity yet, you may be leaving a lot of money and other benefits on the table.

We spoke to Alain Forget, Head of Sales & Business Development at RBC Bank, the U.S.-based division of the Canadian bank and a national residential lender specializing in helping Canadians to buy cross-border. Forget is a fellow Canadian with over 15 years of experience in cross-border banking. 

 “A lot of Canadians don’t even know that they can leverage the U.S. home equity they have built over time,” said Forget. “And they might not know about the strategies to put that equity to use.” 

If you have only recently purchased a U.S. home or are planning to soon, you should still know about these options for utilizing U.S. home equity, even if you may not be able to take advantage of them just yet. As your home equity continues to increase in value, these options will become available to you as well.

In the U.S., there are two major ways you can take advantage of your home equity. The first is a cash-out refinance and the second is a home equity line of credit (HELOC). Both have their own unique benefits, and each may be more applicable in different circumstances. Let’s look at these two options in more detail.

Cash-out refinance

When you refinance a mortgage, you are essentially paying off your existing mortgage loan and taking a new loan in its place. This provides homeowners with benefits like better rates or mortgage terms or lets them access their home equity with what is called a cash-out refinance. 

A cash-out refinance allows you to turn your home equity into usable cash through a refinance.  The reason this is possible is that the price of your home at the time you bought it is lower than the current value. This means you can take out a mortgage worth more than what you owe, use it to pay off your previous mortgage, and collect the difference as a lump sum in U.S. dollars. You are now free to use this freed-up equity for anything you choose, such as a down payment on another property, purchasing a car, home renovations, and more.

Repayment is essentially the same as your previous mortgage, though you may have a new amortization period and mortgage rate which may be reflected in your monthly payments.

If you own your U.S. property outright (debt-free) it is even better for you since you have full home value to pull equity out without having to repay an existing mortgage. In general, for a second home, you will be allowed to pull up to 80% of the value of your home in a cash-out refinance, though you may go lower if you wish. 

For example, if your mortgage is worth $250,000 and your home is assessed at $450,000, you can pull out 80% of that value ($320,000) and collect the difference between the two, or $70,000.

The process for getting a mortgage refinance will be similar to the mortgage process we outlined in a previous article, so expect to have at least 45 days or so of turnaround and some amount of closing costs to be paid.

Home equity line of credit

A home equity line of credit, or HELOC, is another popular way to tap into the equity of your U.S. home. With a HELOC, you are able to draw upon your home equity on an at-will basis, as opposed to a cash-out where you get your money in a one-time lump sum. 

Also, unlike a refinance, with a HELOC there is no need to renew during the first 10-year draw period. In addition, with a home equity line of credit, you will only be required to repay interest monthly on the outstanding amount of your line of credit that you actually use. Your line of credit may be up to 80% of your home appraised value, but you can also always replenish your available credit by paying down your outstanding amount.

“The beauty of a home-equity line of credit is the flexibility of accessing your equity in U.S. dollars when you need it,” said Forget. “If you need $25,000 to buy a car or you want to pay your property taxes or your home insurance and you don’t want to contend with the exchange rate (currently around 1.28-1.30) you just use your line of credit. So you have U.S. dollars to pay U.S. expenses which helps save a lot of money any time you need USD.”

“Another benefit is that you only need to pay interest on the amount that you borrow. So for example, if you have a $300,000 line of credit but you only need $50,000 for home repairs or renovations, then your monthly payments will only include interest on the outstanding balance used.”

A HELOC generally has around a 30-year life cycle. The first 10 years are the draw period, during which it serves as an open line of credit. Beyond that time, you will enter a repayment period with regular payments to both principal and interest, though you can also repay in full at any time without penalty.

Which is right for me?

Though both of these options allow you to draw from your home’s equity, they each have uses for which they are most suited. In general, a refinance is most appealing for its large lump sum aspect. This means if you have a specific large purchase in mind, a cash-out may be right for you. Another purpose is to use your cash-out funds to consolidate your debt into a lower-interest loan.

A home equity line of credit is useful when you want to take out smaller portions of your equity as you go along. This can be helpful for any unexpected costs that come up for property maintenance or just for general lifestyle expenses when you are in the U.S.

Why tap into your home equity?

For a Canadian who holds a U.S. property, taking advantage of your home equity offers a lot of benefits. For one, there are many costs involved with owning a home and your lifestyle over the border. If you are constantly converting Canadian dollars into USD, you will always be at the whim of the exchange rate and any related processing fees. The benefit of using your equity is that you can draw on funds in USD that never need to be converted. Using your U.S. home equity then allows you to have a financial source on both sides of the border, which can help you make the most of currency exchange whether the loonie is up or down.

In addition, many Canadians use their U.S. properties as temporary vacation homes. If you return for the winter and are surprised by unexpected repairs needing to be done, your home equity can help cover these costs without the stress of bringing funds over the border, or if you have simply owned your home for long enough that you want a refresh in the form of a renovation or other improvements. For condo owners, with an unexpected “special assessment” from the Home Owner Association, your home equity can help.

You can also go the other way and draw U.S. funds to convert back to Canadian dollars. With the loonie where it is, your equity will go even further after conversion and can be used for anything you wish back in Canada – especially if you purchased your U.S. property in cash while the Canadian dollar was at par with USD. 

Finally, one of the most compelling reasons to tap into your equity is simply that it is available to you. Your property is a home, but it is also an investment, and investments should provide value to you. Many people believe that to get their equity out of their home they need to sell, but this is not the case! With a cash-out refinance or HELOC, you can get the best of both worlds, and take advantage of your home equity while still getting to enjoy the benefits of a U.S. property.

“Also, the beauty is that a traditional U.S. refinancing or home equity line is not a taxable event,” adds Forget. “A lot of people have seen their property go up in value over the last two years and think maybe they should sell. They could, but then they have a capital gain and they are going to trigger a lot of legal and tax issues that will have to be addressed, and the big question remains: where do they go next winter? Instead, if they keep the property, they can enjoy it while they benefit from the equity that the property offers.”

As usual, whenever it comes to cross-border real estate and banking, Forget encourages you to consult professional financial, legal and tax experts to get advice on those underlying cross-border issues when deciding to go with any of these options. Not only can they help you avoid potential pitfalls, but they can even help you find benefits like tax deductions you may not have been aware of.

RBC Bank offers Canadians access to their own network of legal and tax professionals who are trained to help support you with your financial needs over the border, as well as full-service support for all the rest of your cross-border banking needs. Until the end of June, RBC bank is offering a $0 underwriting fee on eligible mortgages and zero/low closing costs on eligible HELOCs, an offer that could save you hundreds or even thousands of dollars. Visit them online today to learn how you can unlock your U.S. home equity.

2022-02-24 13:21:00

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