What is a HELOC?
First off, HELOC stands for "Home Equity Line Of Credit". This is a secured form of credit where the lender uses the equity in your home as a guarantee that you will pay back the amount borrowed. The amount you are eligible to borrow has a certain limit with HELOC's.
How is this limit set?
Lenders consider various factors when deciding how much you are eligible to borrow through a HELOC. They take into account your credit history, any outstanding debts, but mainly they will consider the current market value of your home and the outstanding balance on your mortgage.
For instance, if you own a home valued at $700,000 and still owe $480,000 on your first mortgage, then your home equity stands at $220,000. Lenders typically limit the amount you can borrow to no more than 80% of the appraised value of your home minus what you owe on your mortgage.
In this case, the maximum amount you’d be able to borrow is $80,000. Here’s how that’s calculated, assuming there are no other liens on your home.
Home’s market value: $700,000
80% of home’s value: $560,000
Minus mortgage balance: $560,000 – $480,000
Potential line of credit: $80,000
What are the benefits of a HELOC?
One of the major benefits of a HELOC is that there are no pre-payment penalties as there often are with mortgages. This offers a lot of flexibility in the way of pre-payment options - whether you want to make payments daily, or weekly: the choice is yours. The minimum payments required for your HELOC are interest only - and HELOC interest rates are usually significantly lower than those of credit cards.
When do I have to pay it all back?
HELOC's are tied to your mortgage term. This term can be different for everyone depending on your mortgage strategy - although you are able to renew your HELOC at the time of your mortgage renewal.
Does it cost anything to get a HELOC?
There are a few costs associated to getting a HELOC - the most obvious being the amount of interest you will be paying on the amount borrowed. As mentioned above, there are no pre-payment penalties with HELOC's, so the faster you pay it off, the lower the amount of interest you will need to pay.
Another cost associated with getting a HELOC are the couple hundreds of dollars it may cost you to get your property appraised. Since your HELOC largely depends on the market value of your home, this cost is pretty necessary. There may be a few legal fees as well depending on the HELOC eligibility of your current mortgage. Best way to determine whether a HELOC is a good idea for you is to reach out to your mortgage specialist.
What can I do with a HELOC?
There are lots of things you can do!
Pay off some of your debts - since HELOC interest rates are often lower than traditional credit card interest rates, it may benefit you to use your home's equity in paying off other lines of credit.
Emergency Fund - life can be unexpected and knowing what funds you have available in the event of an emergency can definitely give you some peace of mind.
Home Renovations, Repairs, or Maintenance
Whatever you decide to do with your HELOC is up to you. At Venture Mortgages, we're happy to explore different mortgage strategies and see if a HELOC is the right decision for you. Give us a call or send us a message to set up an appointment!