All opinions are mine and mine alone.
Canadians aren’t shy about investing in real estate. In fact, more than two-thirds of all Canadians are homeowners. But do they know how to use the equity and cost of their home as financial leverage?
When you buy a house, it might be new to you, but that doesn’t mean it’s newly constructed. Many first-time homebuyers purchase fixer-uppers at a lower price and factor in remodel costs as part of the overall purchase.
This is a good option, as it lets you move into your home and remodel it incrementally. However, taking on a remodeling project of just about any kind is expensive. And, with a mortgage, it can be difficult to put away money for various home improvement projects.
Then again, with a home equity line of credit, or HELOC, you have the extra capital to remodel your home and much more. Learn the ins and outs about a HELOC and how you can go about securing one.
What is a HELOC?
In short, a HELOC acts a lot like a credit card, as it lets you borrow money against the value of your home for a variety of expenses. This is not to be confused with a home equity loan. While a home equity loan is a second mortgage that gives you a lump sum of money that’s paid off over time, a HELOC is more like a credit card that uses your home as collateral. Fixed or variable interest rates are available depending on your needs.
How Do You Calculate Your HELOC?
A HELOC limit is dependent on a variety of factors. Most banks in the United States and Canada offer HELOCs between 75 percent and 90 percent of the overall cost of your home, minus the pending mortgage amount. Your credit score may also play a key factor. For example, if your home is valued at $300,000 and your mortgage is $200,000, your HELOC will be between $75,000 and $90,000, depending on the financial institution with whom you partner.
What’s the Best Use for a HELOC?
People most commonly use a HELOC for home improvement projects, but these lines of credit are not restricted in their use. Some families use them to pay for college, weddings or to consolidate debt onto a single line of credit. Of course, like any line of credit, interest applies.
But remember, a line of credit is not like a loan. You only pay interest on the credit you use. Thus, it’s paramount you only use your HELOC on what you need. Limit your interest costs in this way. Also, structure your interest payments in a way that works best for you. Whether weekly, monthly or bi-monthly, there are a host of options, though it’s essential you explore amortization periods, and average mortgage interest rates by province or region.
While a HELOC is a valuable tool for homeowners, it does come with some risks. HELOCs often have an “interest-only” period in which homeowners can elect to pay only the interest they have accrued each month. However, at the end of this period, those who have only paid the minimum interest of their HELOC will be saddled with much higher payments. Therefore, it’s essential you research your options.
Further Research
Now that you know what a HELOC is and how it differs from a home equity loan, it’s time you take a deeper look. It’s easy to calculate your potential HELOC, but the nuances of amortization and fixed versus variable interest rates are essential discussions you must have with a trusted bank.
Speak Your Mind