A Home Equity Line of Credit is used if you own your home and have built up equity (see below for calculation). With a HELOC, the collateral is your property and it allows you to establish a line of credit for a set amount. Similar to a second mortgage but ways it differs than a second mortgage is a set amount borrowed, interest rate and is on a term; it is paid an agreed regular basis.
With a Home Equity Line of Credit, interest is charged only on the amount you borrow and a limit is set on how much you can borrow. It is revolving and similar to a credit card.
To qualify for a Home Equity Line of Credit, you should have enough equity, a good credit rating and the income. You can use a HELOC for any type of expense and any monies paid above the interest will be returned to the account to be accessed when required. The great thing is you don’t have to apply when you need to borrow. The interest paid on a Home Equity Line of Credit may be tax deductible so check with your tax advisor or specialist.
Equity refers to the difference between the current estimated value of your home and the amount you have paid towards the first mortgage, this is also called an LTV (Loan to Value).
To find out if how much you can afford with a HELOC, here is the calculation. Calculations based on a home valued at 500K with Mortgage Balance of $350,000
(Value of home x 80%) – Mortgage Balance = Maximum Amount to Borrow
($500,000 x 80%) – $350,000 = $50,000
With the above example, if the value of your home is $500k and you wish to renovate, most likely you can get a Home Equity Line of Credit for $50K (you also need to take your credit rating into an account). This is based on a basic calculation and is only meant as a guide, a Mortgage Broker or Agent can get the numbers of a loan amount you would qualify for.
How do Interest Rates work with a Home Equity Line of Credit
You can lock part of all of your outstanding Home Equity Line of Credit balance into a fixed interest rate for a closed term or choose the Variable rate to pay down (prepayment) at any time, for any amount up to and including the total outstanding balance. Check with your Mortgage Broker and the best rates available to you.
We hope we have given you have a better understanding of What is a Home Equity Line of Credit HELOC.
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