A Home Equity Line of Credit (HELOC) is a secure form of credit in which the lender uses your home as security (collateral). There are two types of HELOC loans, one that is combined with a regular mortgage, and the other a stand-alone product.
If you are purchasing a home and choose to add a Home Equity Line of Credit to your mortgage, with a 20% down payment you’re able to secure credit for up to 65% of the value of your home, and then utilize a mortgage for the remainder, thereby securing funds totaling 80% of the appraised value of the property.
For Example: If the purchase price of your home is $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
Using the same numbers as above, if you wanted a stand-alone Home Equity Line of Credit (HELOC) then you would be required to put $140,000 down as government rules limit the maximum amount of money available to 65% of a homes appraised value.
HELOC’s are revolving credit, meaning this provides you the option to borrow, pay what you borrow back, and repeat as often as you like. The minimum payment is interest-only and you have the option of making lump sum payments anytime with no prepayment penalties.
This form of credit can be a great investment tool as you have readily available access to credit however, there is some discipline required in managing the line of credit. Without a plan in place you may find your spending is greater resulting in high debt for a longer period of time. Be sure to have good budgeting practices in place.