HOME EQUITY LINE OF CREDIT – HELOC
Leverage the value of your home to other products.
All right! Who doesn’t love a good acronym? Sometimes it’s pretty easy to get lost in industry jargon. We’ll do our best to introduce you to HELOC and ensure you have a clear understanding of how it works.
HELOC stands for Home Equity Line of Credit, and it’s a way of applying the value of a property to other credit products. Lines of credit are pretty standard products at banks these days – like credit cards, lines of credit allow you to access funds at your convenience, and make payments with more flexibly than a typical loan.
When looking at a line of credit you may hear Personal Line of Credit and HELOC or Home Equity Line of Credit. Let’s have a look at the difference.
If you negotiate a personal line of credit without a house or lump sum of money in the bank to act as a sort of collateral, the rate of interest you pay will hover somewhere between that of a typical mortgage (sometimes under 5%) and that of a credit card (often upwards of 20% or 25%!).
Hoe does a HELOC account work?
With a HELOC, you are using your property to guarantee the amount borrowed. The bank or lender then feels comfortable offering more reasonable interest rates. This is a revolving account allowing you to draw on at any time as long as there are funds. Minimum repayment is interest only on a monthly basis. The great thing about a HELOC is that once you have repaid a portion of, or the total amount drawn, the funds are available for you to draw on again.
To calculate an estimate of the equity you currently have in your home, subtract the principal of your current mortgage from the most recent assessment or evaluation. If you are looking to secure a HELOC an appraisal will be required by the lender to determine the value of your home.
WARNING: The following paragraph contains numbers and math and stuff. Not a lot, mind you… We just want to give you time to prepare yourself.
For example, if you owe $200,000 on a $500,000 piece of property, you have $300,000 worth of equity.
- $500K – $200K = $300K
- Evaluation – principal = equity
- Based on this $300,000 in equity, the lender will consider giving you a Line of Credit at a much lower rate than if you applied without the property in the equation.
Just how much HELOC can you get? Beware, more math!
The government limits HELOCs to 65% of the value of the property, though in combination with a mortgage you can borrow up to 80%. Here’s how this might look, using an purchase price of $400,000.
- $400,000 x 20% = $80,000 down payment
- $400,000 – $80,000 = $320,000 financing;
- $400,000 x 65% = $260,000 HELOC;
- $320,000 – $260,000 = $60,000 mortgage
HELOCs – and lines of credit in general – are a great fit for people who are able to resist the temptation to access the entirety of their credit limit just because it’s there. If you max out your credit cards without a plan for paying them off, or started thinking of a third car or a trip to the Bahamas, you might want to steer clear of a HELOC.
In short, we don’t recommend using a HELOC a method of having fun and buying toys. You worked hard to build that equity, and it’d be a shame to find yourself up to your eyeballs in debt all over again for some short-term playtime.
If, however, you’re the kind of person who is able to stick to a reasonable budget, a HELOC can be a powerful tool in boosting your household purchasing power and enjoying your hard earned financial position.
Whether or not you currently own a home, a mortgage broker can help you determine your current and potential equity, and a plan to build that number moving forward.