What Is a Home Equity Line of Credit AKA HELOC?

Many people buying homes in Nanaimo will turn to a HELOC to finance the purchase of a second property. A home equity line of credit, also called HELOC, is a line of credit secured by your home that gives you a revolving credit line to use for significant expenses or to consolidate higher-interest rate debt on other loans such as credit cards. In simpler terms, the lender uses your home to guarantee that you will pay back the money you borrowed from them, and it revolves around credit, allowing you to borrow up to a set maximum credit limit.

Difference between home equity line of credit and a home equity loan

For most Canadians, a home is the heart of their investment portfolio which can be used strategically to their advantage. The homeowner has two options where they can use their home to borrow a loan. One is a home equity loan where you can borrow a fixed-rate loan against the equity built up in your home, while the other option is a HELOC. The main difference between the two financing options is that, unlike HELOC, you can borrow until you reach the maximum credit limit. For a home equity loan, you have to pay another round of closing costs before taking out a new one, and it always comes with a higher interest rate because of the high level of risk being exposed to the mortgage lender. Here are some significant differences between the two home finance options.

• Fund disbursement method: For a home equity loan, you get a single lump sum, whereas, for HELOC, you withdraw from the credit line as needed.
• Interest rate: HELOC has an adjustable interest rate while home equity loans are fixed.
• Monthly payments: Fixed instalments covering principal plus interest is required for home equity loans compared to HELOC, which has interest for only ten years, then payments balloon.
• Closing costs: There are no closing costs involved for HELOC, but you have to pay closing costs when securing a home equity loan.

Why you should consider a home equity line of credit (HELOC)

Low-interest rates: Since the home equity line of credit is secured by your home equity, HELOCs can offer lower rates than unsecured loans like personal loans . As an adjustable loan rate, HELOCs can give you a lower rate than a standard home equity loan.

Borrow as much as you want: After setting up a HELOC, you have access to your funds, and you can use them as you wish. In contrast to other types of loans, you don't have to justify your plans for using the funds. However, the burden is now on you to use the funds responsibly since they are backed with your home. HELOCs are flexible: A home equity line of credit lets you borrow the total amount you need when you need it. You can only pay interest on what you have borrowed, which makes them helpful in covering ongoing expenses over some time.

Tax advantages: Since the home equity line of credit is a type of mortgage, all interest paid up to $100,000 in loan principle is tax-deductible for most borrowers who itemize.

Caps on rate increases: You have some protection against rising interest rates because your home equity line of credit has a maximum cap on how high it can climb. Before agreeing to the loan, check the lifetime cap and ensure that you can meet the monthly payments even if it jumps to the maximum.

The home equity line of credit offers homeowners looking to borrow based on their home equity an opportunity to have financial freedom for as long as they deem possible. It is much cheaper in terms of interest than a home equity loan and offers attractive incentives to maintain its position as the best loan you could take with your home equity.

As a Realtor, I am not trained in lending nor do I offer lending advice, but would be happy to refer you to a mortgage specialist.