Are you considering a home equity line of credit (HELOC) but aren't sure what it is or how it works? Here's what you need to know.
What is a HELOC and How Does it Work?
A HELOC is a line of credit that is secured by the equity in your home. It provides access to a large amount of money at a lower interest rate than many other forms of credit, and it's a flexible solution that allows you to borrow only the amount you need, when you need it, and only requires interest-only payments.
It works like a credit card, with a credit limit that you can borrow against as needed. The amount of equity you can access with a HELOC depends on the value of your home and the amount you still owe on your mortgage.
Typically, you can borrow up to 65% of your home's value minus the amount you owe on your mortgage. For example, if your home is worth $500,000 and you still owe $300,000 on your mortgage, you could be eligible for a HELOC of up to $100,000.
One of the key features of a HELOC is that you only have to make interest-only payments. This means that you only have to pay the interest that accrues on the amount you borrow, not the principal amount itself.
The advantage of interest-only payments is that they can make a HELOC more affordable in the short term. This can be useful if you need to borrow a large amount of money but don't have the cash flow to make principal and interest payments. It can also provide more flexibility, allowing you to pay down your principal as you are able, rather than being required to make fixed monthly payments.
Unlike a traditional mortgage, a HELOC is an open mortgage, which means that you can pay down as much of the balance as you want at any time without penalty.
What are the Most Popular Uses for a HELOC?
One of the most popular uses for a HELOC is to consolidate high-interest debt, such as credit card balances or personal loans. This can help you save money on interest and reduce your monthly payments. A HELOC can also be used for home renovations, major purchases, or investments.
Total Equity Mortgage: HELOC and Mortgage Combination
A total equity mortgage is a combination of a home equity line of credit (HELOC) and a traditional mortgage. This can provide additional borrowing power and flexibility, allowing you to access your home's equity while still maintaining a low interest rate.
One of the key benefits of a total equity mortgage is that as you pay down your mortgage, your available limit on your HELOC increases. For example, let's say you have a total equity mortgage with a $300,000 mortgage and a $100,000 HELOC. As you make payments on your mortgage, the amount you owe will decrease. This means that the amount of equity you have in your home will increase, and so will your available limit on your HELOC. So if you pay down your mortgage by $20,000, your available limit on your HELOC would increase by the same amount, to $120,000.
This flexibility can be useful if you need to access additional funds for things like home renovations, major purchases, or investments. It can also provide peace of mind knowing that you have access to extra money if you need it, without having to go through the hassle of applying for a new loan.
Closing Costs for a HELOC
When applying for a home equity line of credit (HELOC), you should be prepared to pay for closing costs such as an appraisal and legal fees.
The Prime Lending Rate and Its Effect on HELOC Interest Rates
The prime lending rate is the interest rate that banks charge their most creditworthy customers for short-term loans. This rate is used as a benchmark for other forms of credit, such as mortgages, credit cards, and home equity lines of credit (HELOCs).
When the prime rate rises, the interest rate on your HELOC will also increase. This is because HELOCs are typically based on the prime rate, plus a margin. For example, if the prime rate is 3% and the margin on your HELOC is 0.50%, your interest rate would be 3.5%.
If you're concerned about potential interest rate increases, With most lenders you have the option of locking in a fixed-rate amortized mortgage with your HELOC at any point, for free. This can provide more stability and predictability for your monthly payments.
Why Use Dominion Lending Centres?
As one of Canada's largest mortgage brokerage companies, Dominion Lending Centres offers the best rates and products available.
Our large volume gives us access to discounts - and we pass those savings along to you.
Sometimes we can even get our clients better rates from their own banks than what they can be offered at the branch.
In addition to great savings, you also get unbiased advice from an experienced mortgage broker that is dedicated to you and focused on giving you an amazing experience.
Contact Us Today to Discuss Your Goals and Learn Your Options
If you're interested in applying for a HELOC, we're here to help. Contact us today to discuss your goals and learn about your options.
It’s free, it’s easy, and it saves you time and money. So get your FREE no-obligation consultation today!