What is HELOC?
A home equity line of credit (HELOC) is a revolving line of credit that allows you to borrow the equity in your home at a much lower interest rate than a traditional line of credit. Homeownership is about more than having a roof over your head. Home equity represents real wealth you can tap to accomplish your goals. Home equity is the current market value of your home minus the remaining balance of your mortgage. Essentially, it's the amount of ownership of a property you have built up through both appreciation as well as reductions in the mortgage principle made through your mortgage payments. So, as you pay off your mortgage and build equity in your home, a HELOC gives you the ability to reborrow a portion of these funds. You can use HELOC funds at your discretion for renovations, debt consolidation, higher education or anything else you need. Just remember that the HELOC is secured by your home and cannot exceed 75% of your home's value.
A HELOC is a line of credit secured by your home. That opens the door to a preferential interest rate. Once you’re approved, you can transfer funds to your chequing account from your HELOC and use those funds however you wish, whether it’s to renovate your home, invest, or pay off higher-rate debt.
You will only pay interest for the money you use. Generally, the interest owing will be the minimum you’ll have to pay each month. To better manage your balance, make lump-sum payments whenever you like, or set up a regular payment program.
Some people confuse HELOCs with mortgage loans, but they are different. A mortgage is used for one purpose: to fund the purchase of a home. You never see the money, since it’s conveyed to the seller, and for the most part, you stick to a repayment schedule that typically stretches from 15 to 30 years.
HELOCs, by contrast, are revolving credit lines that use your home as collateral against default. What you spend HELOC funds on needn’t have anything to do with real estate. The only role of your home in a HELOC is to serve as collateral to secure the money you borrow.
If you have a $100,000 HELOC, for example, you can borrow up to that amount at an adjustable interest rate. If you never use more than $20,000 of the HELOC line, you will only pay interest on the $20,000 you borrowed, not on the $100,000 that is the maximum value of the line.
Once you’ve been approved, the lender might give you a HELOC account card or checks so you can use with your HELOC line conveniently.
If you sell your home, you will be required to repay what you owe on the HELOC right away. This is usually easily done if the sale price exceeds what’s owed on the HELOC and any other mortgages. But it can mean trouble if the home is underwater, meaning it’s worth less than what is owed to the lenders. If that happens you’ll need to make up the difference from your other savings or negotiate a deal, called a short sale, with the lenders.
HELOC vs. Home Equity Loan
Consumers often mistake HELOCs and home equity loans for being the same thing. They are not.
A home equity loan is a lump-sum payment, usually for a large project like remodeling or installing a pool. You start repaying the loan with fixed-monthly installments right away.
A HELOC, on the other hand, is a line of credit that usually lasts 10 years. You can nibble away at it to pay for several, small home-improvement projects or you can use it in big chunks to pay for a vacation or wedding. The interest rate on HELOCs is variable and you could take as long as 30 years to repay them.
HELOCs and home equity loans share a key similarity: Both allow you to borrow against the equity you’ve built in your home and charge interest on the proceeds. But the way you borrow, how you repay and the way interest is charged, differs considerably between the two.
Should you get a HELOC?
HELOCs can even be a useful tool for consolidating your debt. If your credit card bills or student loan debts have piled up, it can be helpful to pay them off with a HELOC – you’ll have one monthly payment to contend with and a lower interest rate to boot!
Some lenders offer an added feature on their HELOC products, allowing borrowers to convert a certain portion of the loan to a fixed-rate mortgage, essentially adding to the mortgage they already have. This feature lets borrowers take advantage of the rates available on fixed mortgages and protects borrowers from higher floating rates in the future.
Our mortgage experts can help you find better rates for your home equity line of credit.