Home equity line of credit (HELOC)

Cash in on the equity you built with your home. With a HELOC, you use your house as collateral and essentially gain access to a secured revolving line of credit.

How does a HELOC work?

Essentially, homeowners borrow against their home to access funds that they can use on an ongoing basis. Borrowers pay a floating interest rate that can vary by lender, and it’s usually higher than their mortgage rate. More a line of credit than a loan, HELOC funds can be accessed as needed rather than paid out all at once like a mortgage or a car loan. You can also add to and withdraw from the HELOC on a continuing basis.

To determine the size of your HELOC, lenders have to calculate the value of your home. Your HELOC will usually equal up to 80% of this amount, minus whatever you owe on your mortgage. For example if you own a home worth $500,000 and your mortgage balance is $300,000, the HELOC would be 80% of the value of the home, or $400,000, minus your $300,000 mortgage. You would end up with a $100,000 home equity line to spend on whatever you choose – renovations, a car, tuition – the possibilities are (almost) endless!

Should you get a HELOC?

HELOCs can even be a useful tool for consolidating your debt. If your credit card bills or student loan debts have piled up, it can be helpful to pay them off with a HELOC – you’ll have one monthly payment to contend with and a lower interest rate to boot!

Some lenders offer an added feature on their HELOC products, allowing borrowers to convert a certain portion of the loan to a fixed rate mortgage, essentially adding to the mortgage they already have. This feature lets borrowers take advantage of the rates available on fixed mortgages and protects borrowers from higher floating rates in the future.

However, borrowers interested in tapping equity should be aware of the HELOC’s drawbacks as well. They certainly aren’t for everyone: interest rates are usually much higher than on standard mortgages, some by 200 basis points or more (200 basis points represents 2% interest per year on your loan)! Also, because HELOCs float with the market, rising interest rates could suddenly translate into higher payments than you expected. As a source of cash they should be used judiciously and paid back quickly.

See if a HELOC is right for you by using the powerful tools available here at LowestRates.ca.