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

You may have come across the term “Home Equity Line of Credit” in the newspaper or on the radio, but are you unsure of the details surrounding this borrowing vehicle?

If so, don’t be alarmed; many Canadians feel the same way.

If you are like most, you probably know that a Home Equity Line of Credit (or HELOC) will provide a revolving credit line which you can borrow from freely much like a credit card.

What you may not know is the important details which are associated with taking out this type of revolving credit line.

What is Home Equity?

The equity in your home is the amount or value of your home that you have already paid off of your mortgage. For example, if your home is worth $200,000 and you have only $50,000 left on your mortgage, then you have $150,000 of equity in your home.

If you have a significant amount of equity in your home, banks will allow you to borrow money against the equity you have in the property. In other words, the bank will allow you to take out a second mortgage on your home. By taking out a HELOC and maxing out the available funds, you are essentially refinancing your home to take some (or all) of the money you have put into it over the course of your mortgage.

Is a HELOC Bad?

Home Equity Lines of Credit are not a bad financial tool, if used appropriately. When people use and abuse the power of a HELOC without understanding the implications of doing so, negative press often taints the public view. Similar to how many look down on the use of credit cards because of the massive amounts of consumer debt associated with them, the HELOC has a similar reputation.

Common HELOC Traps

A HELOC can actually cause bigger problems than a credit card for some consumers, since you can access this secured credit line much like you would your chequing account whereas a credit card typically has a cash advance limit. Most HELOC accounts will actually give you cheques and a debit card which can be a negative to borrowers who have little self control. It may only take a matter of a couple months until you are swimming in debt, if one is not conscious of their spending.

Benefits to a HELOC

I personally think a Home Equity Line of Credit is a great financial tool and offers the following benefits when used appropriately:

• Typically offer much lower interest rates than a credit card or other unsecured loans
• Interest rate follows the prime interest rate. Typically 0.5% to 1.5% above prime
• Offer a much cheaper alternative to handling consumer debt than what may be owing on your credit card

So When Is a HELOC a Good Idea?

• Doing renovations to your home
• Consolidating credit card debt, as long as you create a plan to avoid making your situation worse.
• Helping kids pay for schooling
• Emergencies

The key to using this financial tool effectively is to ensure that you realize that this is tied to your current home and think long and hard before making a large purchase just because the money is available to you.

If you typically spend that extra bit of available credit on your VISA or MasterCard each month, then this product is probably not for you.

Interested in exploring the options available to you by utilizing the equity in your home? Contact Hussein Saad and Home Mortgage Ontario today for a free, no-obligation financial analysis.