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Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit (HELOC) is a cost effective method to secure a loan with lower interest rates compared to traditional lines of credit or loans. It is one of the best methods to secure funds and gives you a way to utilize the value you’ve built in your property.

A HELOC gives you access to the equity built up in your home which can be used for any number of expenses, such as long term investments, emergency funds, educational costs and debt management. It can also be used to pay off your mortgage.

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    What is a Home Equity Line of ?

    Home Equity is the value difference of your home subtracted by the amount of your remaining mortgage. I.e, a home with a value of $500,000 and a remaining mortgage of $200,000 will have an equity of $300,00 A Home Equity Line of Credit (HELOC) is a secured line of credit that is taken against the equity built up in your home. The credit limit available on a HELO) is up to 65% of the market value of your home The total amount of your outstanding mortgage combined with your HELOC cannot equal more than 80% of your home’s value. Unlike traditional loans, the total amount is not advanced to you upfront. You choose the amount you wish to spend and then pay interest only on what you have used.

    How does a HELOC work?

    When you take out a HELOC (Home Equity Line of Credit), you’re putting your home as collateral against the line of credit loan and are able to use the funds at your discretion as the total amount of your loan is not given to you upfront like a mortgage. Interest on these loans is only charged on what you have used A Heloc will typically have a term of 5-10 years known as a ‘draw period’, in which you can withdraw funds and only make interest payments.This is followed by the repayment period in which you can no longer draw funds and make payments on interest and principal. This period can last from 10 to 20 years. Because you are using the equity built in your home to take out a loan, a HELOC is also known as a second mortgage, however, it is not necessary to own a mortgage in order to apply for a HELOC.

    What is a HELOC used for?

    Because of its low interest rate, A HELOC can also be used as an alternate means to pay off high interest debts on credit cards, or to pay the remaining mortgage on your home. It is also an excellent tool for consolidating your debt and obtaining funds for investments or making payments for an education. Because you are taking a loan out against your home, it is important to consider whether or not the expenditure you are taking on ultimately adds value to your home and whether or not you are living within your means.

    Tips for Getting a Credit (HELOC)

    Because the burden to prove eligibility is greater on self-employed individuals, it pays to be well prepared before applying for a loan. The following should be considered before going into apply for a Self-Employed Mortgage:

    What do I need to qualify for a HELOC?

    There are some minimum requirements for approval for a HELOC which should be considered before applying.  These are in place to ensure that the lender is protected against the loan going into default.

    • The higher the amount that you own on your property, the more likely you are to be approved.
    • A HELOC is offered to borrowers only if they own a minimum of 20-25% of the equity on their home.
    • Homeowners with larger amounts of equity owned are also eligible for better interest rates.
    • The lender will also perform a background check to confirm the applicant’s ability to repay the HELOC. This includes factors such as your credit history, your debt to income ratio and any documentation concerning previous second mortgages on your property and its repayment.

    What do I need to qualify for a HELOC?

    There are some minimum requirements for approval for a HELOC which should be considered before applying.  These are in place to ensure that the lender is protected against the loan going into default.

    • The higher the amount that you own on your property, the more likely you are to be approved.
    • A HELOC is offered to borrowers only if they own a minimum of 20-25% of the equity on their home.
    • Homeowners with larger amounts of equity owned are also eligible for better interest rates.
    • The lender will also perform a background check to confirm the applicant’s ability to repay the HELOC. This includes factors such as your credit history, your debt to income ratio and any documentation concerning previous second mortgages on your property and its repayment.

    How do you pay interest on a HELOC?

    Home Equity Lines of Credit (HELOC) come with a variable interest rate, meaning it is not a fixed amount for the duration of your loan. Interest rates are usually lower for a HELOC because unlike unsecured credit cards, the borrower’s home is used to secure the loan.

    HELOC’s come with varying options for repayment periods. For example, you could have a 30 year loan in which you spend the first ten years making interest only payments and then paying down the principal for the remainder of the term. Interest payments on a HELOC are also tax deductible.

    How do you pay interest on a HELOC?

    Home Equity Lines of Credit (HELOC) come with a variable interest rate, meaning it is not a fixed amount for the duration of your loan. Interest rates are usually lower for a HELOC because unlike unsecured credit cards, the borrower’s home is used to secure the loan.

    HELOC’s come with varying options for repayment periods. For example, you could have a 30 year loan in which you spend the first ten years making interest only payments and then paying down the principal for the remainder of the term. Interest payments on a HELOC are also tax deductible.

    What are the advantages of a HELOC?

    A HELOC has several features which make it preferable to other types of loans, such as:

    • Lower interest rates compared to unsecured lines of credit
    • Allows you to borrow only in amounts you need at the time, rather than a lump sum
    • Interest paid on principal is tax deductible
    • No limitations on how the loan is used
    • Flexible timing on repayment

    What are the disadvantages of a HELOC?

    Because it is a loan secured against your home, there are some risks to be considered such as:

    • If you default on payments towards a HELOC, you could possibly lose your home
    • Because HELOC’s have variable rates, the amount of your loan could be reduced, or your HELOC could be frozen altogether.
    • You are reducing the value of your home until you have paid back the loan you have taken against it.

    Can a HELOC affect your credit score?

    While most Banks will operate under their own policies, it is recommended if you are only using a small portion of your HELOC to keep the balance under 30% to maintain your credit score.

    A Home Equity Line of Credit is more similar to a credit card loan rather than a mortgage, however it’s usage does not affect your credit score in quite the same way.

    Most Credit bureaus recommend using under 30% of your credit limit to maintain your score. However, most users of a HELOC withdraw the total amount for their usage.

    Is it harder to get a mortgage if I am self employed?

    Obtaining a Self-Employed Mortgage can be more difficult than a traditional mortgage as the borrower has to take extra steps to prove to the lender that they are capable of maintaining regular payments on their mortgage. It is possible that depending on the financial institution, that Self-Employed Mortgages are not offered at all. Where they are offered, there is also the chance that banks will significantly increase the interest rates for these loans, making them a more difficult consideration for borrowers. To give a better chance at being approved, lenders are expected to offer a large down payment, up to 20% or higher, as well.

    Another difficulty associated with Self-Employed Mortgages is the lack of a T4. A full time Employee can provide proof of income through a simple T4, however a self-employed individual must provide a stated income form, which shows the amount the potential borrower claimed to have earned, and then must provide documentation which can prove the stated amount is accurate.

    Lenders will also apply the Debt Service Ratio when considering your eligibility for a loan. This is a measurement which determines your ability to maintain regular payments on a loan after all your financial responsibilities have been considered. These include monthly bills, car loans, lines of credit, student debt and any other loans.

    If after considering these other factors the bank is confident that you are able to meet their requirements for regular payments, you will be eligible for a loan.

    Commonly Asked Questions

    A Home Equity Line of Credit (HELOC) is a loan taken against your property which lets you control how much of your total credit limit to withdraw and allows you to repay it according to your needs within the initial term of the loan, unlike a traditional mortgage which gives you the funds in a lump sum.
    A HELOC typically has a lower rate of interest than a traditional mortgage which makes it a viable option if you’d like to use it to pay off your pre-existing mortgage. You should be mindful of the terms of both loans, especially the conditions of a HELOC’s borrowing and repayment periods.
    A HELOC operates similarly to a credit card rather than a traditional mortgage, meaning you should only utilize up to 30% of your total credit limit at a time to maintain your credit rating. On the other hand, making regular payments on your HELOC can have a positive impact on your credit score.
    A normal loan period for a HELOC is 25 years, which is split into two terms, the draw period and the repayment period. The draw period lasts from 5 to 10 years depending on your loan agreement, during which you can withdraw funds. This is followed by the repayment period which lasts from 10 to 20 years.

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