A home equity line of credit, otherwise known as a HELOC, is a secured line of credit that allows homeowners to borrow and re-borrow against their home. How does it differ from a conventional loan? A stand-alone HELOC cannot exceed 65% of the value of your home. If the HELOC is a second mortgage or part of a combination type of mortgage that has more than one component, it can have a combined limit of 80% of the value for a fixed term as long as the HELOC portion does not exceed 65%. It’s a popular option for homeowners who are looking for financing options to renovate their home while trying to avoid using high-interest credit options. If used responsibly, a HELOC can offer a number of benefits, which we will discuss here, along with any disadvantages that you should be aware of.
The More Equity You Have, the More You Can Borrow
A HELOC can be handy if you’ve been paying off your mortgage for quite some time. If you have a decent amount paid off, you can borrow a much larger amount of money than you would be able to do with other loans. This can be particularly helpful if you need the money for a home renovation, or to fund your children’s education, or for an emergency situation, or for all of the above.
Lower Interest Rates
Although a HELOC will typically carry a higher interest rate than a mortgage loan, it will still be much lower than other lines of credit or unsecured loans. Plus, with a HELOC you only pay the interest on the money you use – you’re not required to make principal payments each month.
You may also be able to receive a tax break for the interest you pay on a HELOC. To ensure you qualify, talk to your accountant or mortgage broker to see what tax benefits are available to you.
With a HELOC, the entire amount is made available to you to use at any time. You can choose exactly how and when you want to withdraw the money, and you can also reborrow as many times as you wish without having to requalify. This gives you much more flexibility over a traditional mortgage loan.
Keep in mind though, that because your home is used as collateral for the loan, failure to make the payments could result in foreclosure. So it’s important to talk to a mortgage advisor who can review your financial situation carefully and determine if a HELOC is a good strategy for you now and in the future.
When you’re ready to talk to an expert, contact us at The Mortgage Advisors. We’ll review your financial situation and help you make the best decision based on your needs.