What is HELOC and to what benefit is it to you, you may wonder. HELOC is the abbreviation for “Home Equity Line of Credit” or simple “Home Equity Line”. Similar to a credit card, a home equity line of credit allows you to use funds and repay balances as you wish. Of course, a home equity line of credit is secured to the equity in your home, and therefore is registered as a mortgage on the property, either in first or second position depending on what is already registered on the property. However, unlike your fixed mortgage, a home equity line of credit allows available funds to be withdrawn, used and repaid. Many times people ask, what is HELOC used for and what advantage does it have? The funds from a home equity line of credit have endless intermittent uses, whether it’s to purchase a vehicle, renovate, use as a down payment to purchase another investment property, pay for tuition… you name it. Here are some advantages and disadvantages of this type of mortgage:
What is HELOC advantage:
-Flexibility of available funds, uses and repayment of the amount borrowed
-Lower interest rate than second mortgage or unsecured line of credit, interest is paid on the amount utilized, not the full amount available
-Easier to obtain than additional funds from a refinance of existing mortgages, also less costly
Some HELOC products are convertible to fixed mortgages at the terms end
What is HELOC disadvantage:
-A HELOC can be registered up to a max of 65% of the home’s value (minus existing mortgages), so unless there is sufficient equity in your home and the request falls less than or within the 65% max, a HELOC may not be the solution for you
-To qualify for a HELOC, good credit behaviour must be shown through a bureau report. Any derogatory on the credit report may decrease the amount the lender is willing to lend you, or deter them from lending at all
-HELOC usually takes the position of first or second mortgage. If it is in second position and you later need more funds, it may not be possible to get any additional mortgages as lenders are trending toward not entertaining the idea of third mortgages
These are just some of the mentionable points, but a HELOC can be customized to suit your needs. Whether you are looking for a first mortgage, a second mortgage or a HELOC, it is important to speak to a professional like CMS to determine what’s best for you not only in the short run, but long term as well. At Canadian Mortgage Services, we`ll take the time to explain the pros and cons, given your specific scenario, lifestyle, intentions, short term and long term goals. We have many lenders with many different HELOC products. You`d be surprised at how many options are available to you.