A home equity line of credit (HELOC) is a way for you to access some of the equity you have tied up in your home. In most cases, you can borrow up to 95 per cent of the home’s value, minus the amount you still owe. For instance, if your current home is worth $300,000, and you still owe $100,000, you could probably borrow up to $185,000.
HELOCs work a bit like a credit card: you only borrow what you need, when you need it. This is an attractive option for those who aren’t quite sure how much money they need. Once you learn a little more about HELOCs, you can easily decide if it’s the right option for you.
Why Do You Need Money?
Many people use HELOCs to make upgrades or repairs to their homes. You take out the money to pay for the supplies you need or the contractor to do the work, and then make payments on the money you’ve used. Hopefully, the repairs you do make the home more attractive to potential buyers, and you’re able to recoup some of your costs when you sell the home.
If you’re thinking about buying a new home, a HELOC can help you access the money in your equity to use as a down payment for your new home. Then, you’ll be able to pay off the full balance of the HELOC when you sell.
Note, though, these examples offer practical ways for you to use the money. They help you reach your goals. You probably don’t want to take out a HELOC if you are thinking about using the money for something more frivolous, like a vacation or a new car. In those cases, it’s better to save up or look for alternative ways to fund the purchase.
Advantages of a HELOC
HELOCs are an attractive way to borrow money. Technically, the money is yours, so it’s relatively easy to qualify for the loan even if your credit is a little lower. They also tend to have better interest rates than what you’d get if you used a credit card or took out an unsecured loan.
Home equity loans also have good interest rates, but many people find the HELOC to be a better option. Since it works like a credit card, you only have to borrow the exact amount you need when you need it. You also have some flexibility with the payments rather than having to pay the money back in instalments like you would if you took out a home equity loan. You know that you’ll be paying off the balance when you sell the home, so you don’t need to stay as focused on reducing the debt.
What to Watch For
As with any other type of loan or credit account, you need to pay attention to the interest rates and the administration fees you incur when you apply for the HELOC. The rates are typically good, but you might get better deals by comparing offers rather than sticking with the bank that currently holds your mortgage.
Additionally, it’s best to be careful about the amount you borrow. If you borrow close to the maximum amount, you might run into trouble if your home doesn’t sell for as much as you thought it would. Play it safe, and only borrow what you need.
Alternatives to a HELOC
If you’re borrowing the money for home repairs, you can always look for financing options beyond the HELOC. For instance, the introductory rate on your credit card could be lower than the rate you’d get with a HELOC. Sometimes, suppliers and contractors allow you to make payments directly to them without paying any interest at all. It’s always worthwhile to check out these options.
If you’re looking to the HELOC to fund the down payment on your new home, you may also have other choices. Those buying a quick possession home, for example, can move into their new home quickly. You could sell your current home, then get a bridge loan to use for your down payment. You may also be able to port your mortgage. This means you’ll combine what’s left of your current mortgage with the new mortgage amount. This gives you a single monthly payment and once you sell the current home, you can usually make adjustments.
HELOCs are a smart way for those who have a lot of equity in their homes to borrow the money they need. However, it’s always a good idea to carefully compare all of your options before you make a final decision.