HELOC Loans: What are They & How Do They Work?

What is a Home Equity Line of Credit (HELOC)?

A home equity line of credit or HELOC is defined as a loan where the lender agrees to lend up to a maximum amount (within a given term) and the collateral for the loan is the equity found in the borrower’s home.  A HELOC operates as a line of credit, so you can pay it down at any time and you can borrow against it at any time.

How Does it Work?

The process to obtaining a HELOC begins by identifying the amount of equity you have in your home. Since, HELOCs  normally allow you to access an amount of funds that can equal up to 80% of your home’s equity (minus the balance on your current mortgage) you are required to have at least 20% equity in your home.

It is possible to acquire a HELOC with another mortgage lender however, if you choose to do this then your first mortgage lender must approve the HELOC at the second place. If you choose to obtain a HELOC with your primary mortgage lender however, they can offer you what is called an All in One. An All in One allows people to have a fixed or variable mortgage portion and a HELOC at the same time. You increase your HELOC credit limit by making payments to pay down your mortgage balance; the more your mortgage gets paid off, the more HELOC funds become available to you.

HELOC Rates

It is important to be aware that HELOC interest rates fluctuate with the prime rate and that quoted rates will likely be stated as prime or prime plus a premium. However, since HELOC payments draw from your home equity, the minimum payments due are just the monthly interest rate expenses.

How Do I Know if a HELOC is Right for Me?

A home equity line of credit can be beneficial if:

• You require home health care, but do not have funds available to pay for a nurse. A HELOC would allow you to use the equity in your home to obtain cash to pay for home care.
• You would like to start a small business or work from home, but do not have funds to pay for such an investment. By setting up a HELOC you can access funds that will help you set up your business , so you can work from home.
• You are currently overwhelmed by debts and would like to pay off large vehicle payments and/or credit card debt. By opening a HELOC you be able to eliminate those debts and live worry-free again.
• You are looking for a way to finance the renovations you’d like to complete on your home.
• You want to access some of the equity in your principal residence to use as a down payment on a rental property.
• You want to invest the equity in your home to build wealth for retirement.
• You’re interested in the Smith Manouevre or a Tax Deductible Mortgage Plan.

If you are 55 or older, have more than 20% equity in your home and are looking for a way to finance a new opportunity then a home equity line of credit can prove to be incredibly useful. Do you think a HELOC might be right for you? Contact Us and we can discuss the options that are available to you.