AKAL Mortgages

The Value of a Home Equity Line of Credit

If you find that you have a lot of expenses lately, you may be tempted to use a credit card to pay for them. And while this can be a good and convenient option at times, there may be other times when a home equity line of credit is a better option.

What is a home equity line of credit?

A home equity line of credit or HELOC is a revolving line of credit. It works in a way that is similar to a credit card in that you have a limit that you are preapproved for and that you can borrow as often as you want as long as you have “room” in your account.

It differs from a credit card due mainly to the fact that a HELOC is a “secured” line of credit whereas a credit card is an “unsecured” line of credit. A HELOC is secured using your home equity – and the advantage of this is that the interest rate that you have to pay on a HELOC tends to be much lower than that of a credit card.

How much money can I borrow with a home equity line of credit?

The amount of credit that you can get approved for with a HELOC is based on how much equity that you have in your home – that is the value of your home minus what you owe on it.  Most lenders will allow you to borrow up to 80% of your home equity.

That means if you have a home that is valued at $500,000 and you still owe $200,000 on your mortgage you have $300,000 in home equity. At 80%, that means you’d be able to get a HELOC limit of $240,000.

How do I go about getting a home equity line of credit?

Of course, you can go directly to a lender like a bank or credit union in order to get a HELOC however the best way to get a HELOC is to work with your mortgage broker.

This is true for a number of reasons.

For starters, mortgage brokers work with a wide range of lenders which means that they can shop around on your behalf to help ensure that you get the lowest possible interest rate. Remember – even though a HELOC tends to be a much better deal than a credit card, you still don’t want to have to pay more in interest than you absolutely have to.

Additionally, your mortgage broker is there to answer any questions you may have and to walk your through the application process. This helps to avoid any problems or delays in getting your approval.

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What home equity borrowing options are available?

Over the past several years, home values in the area have gone up dramatically. And that means that homeowners have much more equity in their homes than they did only a few years ago. One of the big advantages of having more home equity is that you have more borrowing power. Secured loans using the equity in your home can help you finance home renovations, pay for a child’s tuition, give you start up capital for a business and help you consolidate debt, among other things.

But what are your options when it comes to borrowing from your home equity?

There are three main choices including home refinancing, second mortgages, and home equity lines of credit.

Home refinancing

This is when you break your current mortgage in order to get a new one. The new mortgage will be for the amount that you still owe on your home, plus the amount of money that you would like to borrow from your home equity. You then make your payments on the new mortgage as normal.

Of your three options, home refinancing usually has the lowest interest rate but because you are breaking your mortgage, there will also be a financial penalty. This option is usually chosen by homeowners who are close to their mortgage renewal date since this will cause the penalty to be lower.

Second mortgage

Unlike home refinancing, this option does not require you to break your first mortgage. A second mortgage is simply a loan secured by the equity in your home (most lenders allow you to borrow up to 80% of your home equity).

You receive the cash in a lump sum and make payments on it just as you would any other mortgage. With this option, interest rates are a little higher than with home refinancing but there is no financial penalty which makes this a good option if your mortgage renewal date is farther away.

Home equity line of credit

Unlike a second mortgage or home refinancing in which you receive your money in a one-time lump sum, a home equity line of credit or HELOC is a revolving line of credit that works similarly to a credit card. You get approved for a certain amount and then you can borrow and repay as often as you like as long as you don’t exceed your limit.  You are only charged interest on the amount you have borrowed.

This option is best for homeowners with long-term borrowing needs and those who have the discipline to keep up with their payments and only borrow what they need.

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Having some credit available can be a great way to ensure that you are able to fund purchases and products without losing too much of your liquidity. Many Canadians use their credit cards for just this purpose, however relying on credit cards often means paying the high interest rates that go with them. If you are a homeowner with sufficient equity in your home however, a home equity line of credit can provide you with the same security – but at a much lower interest rate.

What is a home equity line of credit?

A home equity line of credit (HELOC) is a revolving line of credit that works in a similar way to a credit card. Once you are approved for a certain amount, you may continue to borrow from that line of credit as long as you are making your regular payments and do not go over your approved amount at any one time. The difference is the fact that where a credit card is a form of unsecured line of credit, a HELOC is secured with the equity in your home. This security allows the lender to offer you a much better interest rate than you could likely get with a credit card or other unsecured line of credit.

How much money can I borrow with a HELOC?

This depends on how much equity you have in your home. Home equity is built up in two ways: by paying down your mortgage, and through increasing home values. So, if the value of your home is currently $800,000 (regardless of the price you bought it for) and you have $300,000 still owing on your mortgage, then you have $500,000 in home equity. Now when you apply for a home equity line of credit, most lenders will allow you to borrow up to 80% of your home equity. So in the above scenario, if you were to apply for a HELOC, you could be able to borrow up to $400,000.

Is a HELOC the right choice for me?

If you have the home equity as well as the self-discipline to not borrow more than you can afford to make the payments on, a home equity line of credit can be a really good alternative to other forms of credit. It is also a good product, for those who wish to borrow from their home equity on a regular basis as you will not be required to reapply each time you want to take out a loan.

How can Akal Mortgages help me with a home equity line of credit?

The professional mortgage brokers at Akal Mortgages can help you with your HELOC by using our extensive network of lenders to help find you the best possible rate on your home equity line of credit. We can also help you prepare any information the lender might need in order to approve your application. If you think that a home equity line of credit might be right for you, we would be happy to help. Contact us today to speak to one of our brokers.