24 Jul 2015
HELOC? Is it me you’re looking for…to better your home financing options?
Do you have a large amount of equity built up in your home? Are you looking to further enhance your financial position? A HELOC may be just the type of financing that you are looking for.
HELOC is an abbreviation for Home Equity Line of Credit. Basically, a HELOC is a credit account that is secured by property that a person owns. This account can be drawn against by the property owner for any number of reasons such as renovations, paying bills/consolidating debt, making a large purchase such as vehicle or property, investing for retirement, etc.
The HELOC option – when used properly, can be a very powerful tool when looking to enhance one’s financial position. In most cases, the interest rate offered on a HELOC is much lower than an unsecured credit line and the limit available can be much higher because the line of credit is secured by valuable property. The interest rate on a HELOC typically sits at/around Prime rate, whereas unsecured lines usually are offered at Prime plus anywhere from 3 to 8%. Considering that retail credit cards often pack interest rates of up to 29.9%, you can see why it makes a lot of sense to have the option of a HELOC, especially for large purchases.
Aside from the interest rate, there are several other attractive options that a HELOC can provide:
- Interest Only payments – most Home Equity Lines allow for interest only payments, meaning your monthly obligation would be less than on a mortgage of the same amount. There is no amortization schedule or commitment to pay back principal required
- Fully-open – unlike a mortgage, there are no early payout fees if you decide to pay-off the line of credit. This option is very attractive to investors who are in the “Fix & Flip” business.
- Revolving Credit – The amount that you have registered for your line of credit is at your disposal for as long as you own the property. If you have a $200,000 line, you can use up to that amount at any time. That means no more having to wait for approval from a bank or lender in the future on large purchases.
Think of these scenarios and imagine the benefits of a HELOC in each case:
* We’re renovating our house (improving our living and our asset)
* I’m consolidating my debt so I can get it paid off sooner
* I’m financing my own business
* We’re buying a revenue property and are concerned about cash-flow from rent
* I’m clearing my credit cards to lower my borrowing costs
* We’re finishing our basement as a rental suite (to earn more income)
* I’m sending my daughter to university
* I’m reinvesting my mortgage to reduce my taxes
* We’re planning and paying for a wedding
* We would like to put a HELOC on our rental property so we can pay off the mortgage on our personal home.
* We’d like to buy a vacation home in another country but don’t want to deal with foreign bank / lender
As mentioned, a HELOC can provide many options to investors when they have equity built up in a home. Homeowners can borrow up to 80% of the value of their home without mortgage insurance premiums in many cases.
Despite the advantages of flexibility and convenience, a HELOC is not for everybody and requires a higher level of financial management than a typical mortgage loan. For this reason, the requirements for obtaining a Home Equity Line of Credit are much tighter than on a traditional loan. In most cases, HELOC are reserved for customers who display very high credit ratings and strong credit history. The interest rate on this type of account is tied to prime meaning that as interest rates go up, so too will monthly obligations. Also, because in most cases, the customer is only required to make interest payments, there needs to be a commitment to paying of the principal balance if the borrower intends to get out of debt at some point.
As with any financial decision, it is always recommended that you consult with a professional. We here at Dominion Lending Centres can help you with various mortgage and loan options. Looking forward to hearing from you soon!