One of the biggest advantages to homeownership is your ability to build wealth over time. With your built-up equity, or in some cases built in equity based on a larger down payment, you will have the option to add what’s called a home equity line of credit to your mortgage.
This is also known as a HELOC, and this loan is secured against your house as collateral, resulting in your lender charging a much lower interest rate. It is often the second cheapest market interest rate available following your mortgage rate.
Now it’s important to not confuse this loan with a standard line of credit. A standard line of credit is a loan that we call “unsecured” because it has no collateral and therefore results in higher interest rate such as prime + 3%, prime + 4% or even prime + 5% and higher. You can obtain this loan by walking into any bank and qualifying for $10,000, $20,000, maybe $30,000.
Let’s look below at some of the frequently asked questions regarding HELOCs
- What Are the Advantages to Having a Home Equity Line of Credit?
- What Can I Do with My Home Equity Line of Credit?
- How Do I Know How Much I Can Get for a Home Equity Line of Credit?
- Is a Home Equity Line of Credit the Right Option for You?
- The main advantage to your home equity line of credit is ongoing access you have to your equity at a low cost of borrowing.
- Rates are typically set at prime to prime + 0.50%
- Because your home equity is secured against your largest asset - your home, you will be able to borrow significantly more than a standard line of credit would allow.
- You can access your home equity line of credit for the purpose of additional investments such as purchasing a rental property.
- The monthly interest that you are charge when advancing funds from your HELOC for the purpose of any investment is tax deductible.
- Unlike a typical mortgage, a home equity line of credit allows you to make interest only payments, otherwise giving you the option of a lower-than-normal monthly payment. You can begin making principal and interest payments at any time.
- Your HELOC also gives you the maximum flexibility to use and pay off as you see fit. There are no restrictions to how fast or slow you can pay off your loan if you are making the minimum monthly interest payments.
- Many HELOC products when combined with your mortgage are re-advanceable. Thus, meaning as you pay down your mortgage, the limit of your HELOC will continue to grow. Your home equity line of credit is a revolving source of funds that you can access at any time.
Some of the more common reasons Canadians love their HELOC is their ability to complete home renovations, pay off high interest debt with low interest debt, and most importantly, have the ability to invest in assets that help create long term generational wealth Many borrowers also prioritize having the means of an emergency fund if ever needed. With a HELOC’s exceptionally low interest rate, you can borrow against your home without going further into debt on your credit cards or lines of credit each month.
A home equity line of credit is combined with a mortgage as a secondary source of funds should you need them in your future. With any HELOC product, you will need a minimum down payment of 20%, maxing out at a total HELOC value of 65% of your homes current value. Let’s look at an example:
- Let’s assume your lender offers a combined loan to value of 80%, meaning the combination of your total mortgage and HELOC option is 80% of your homes current value.
- Your appraised home valuation comes in at $1,000,000, and your current mortgage balance is $450,000.
- Based on the given numbers and subject to qualifying, you may add an additional HELOC to your mortgage of $350,000.
(Your home value x 80% - your mortgage balance).
- You now have the option to advance all or some of those funds, or you can leave the credit line untouched until needed.
- Subject to income qualifying, we recommend adding a HELOC to your mortgage as there are only advantages to you.
- It’s important to note that this HELOC option does not penalize you for funds you leave untouched and does not have any reverse affect to your credit. Without an added HELOC, if you require access to your equity, you will need to reconstruct your mortgage, resulting in lender penalties & legal fees.
- A home equity line of credit (HELOC) is a convenient and inexpensive means to borrowing money using your home’s current value as collateral. Because of the collateral backed loan, the interest rate on this credit line is significantly lower than an unsecured source such as a credit card. If you’ve lost your job, have unexpected bills, need to consolidate high interest debt, require renovations to your home, want to invest, seek an emergency fund, or just need cash, and you have equity in your home, securing a home equity line of credit (HELOC) may be an ideal solution for you.