When it comes to securing financing for your home, there are a variety of options available to homeowners. One of these options is a Home Equity Line of Credit, or HELOC for short. This line of credit is a type of secured loan that is registered against your home, allowing you to draw equity out of it when you need it.
There are many benefits to having a secured line of credit, like a HELOC, over an unsecured personal line of credit (PLOC). Firstly, since a HELOC is secured by the equity in your home, lenders are more likely to approve you for a much higher amount at a lower rate, as they face less risk when doing so.
However, it is important to note that a HELOC is still a type of mortgage. If you have money owing against your home through a HELOC, then you are not technically mortgage free. Some people may not realize this and mistakenly believe that they are, so it is important to clarify this point.
A mortgage, in simple terms, can be defined as a loan that is secured by real estate. And this is exactly what a HELOC is – a loan that is secured by the equity in your home. The main difference between a HELOC and a traditional amortized mortgage is that one is amortized while the other is not.
An amortized mortgage is a type of mortgage that has payments that are split between principal and interest over a specific time period, usually around 25 or 30 years. As the mortgage is paid down, you build equity in the home. However, you cannot re-access that equity without either refinancing, or adding a HELOC to your mortgage.
A HELOC, on the other hand, is a revolving account that allows you to re-access the funds at any time. There is no set amortization period for a HELOC, as the minimum payment covers interest only. This flexibility makes a HELOC an attractive option for homeowners who need access to funds for renovations, emergencies, or other expenses.
Despite the flexibility of a HELOC, there are some drawbacks to consider. Firstly, the rate on a HELOC is often much higher than the rate on an amortized mortgage. This can make a significant difference over time, particularly if you have a large amount owing on your HELOC. It is important to shop around for the best rates and terms before committing to a HELOC.
Another factor to consider is that a HELOC is a type of secured loan. This means that your home is collateral for the loan. If you are unable to make your payments on time or default on your loan, your lender has the right to seize your home and sell it to recover the funds owed. This can be a scary thought for many homeowners, so it is important to understand the risks before taking out a HELOC.
Overall, a HELOC can be a useful tool for homeowners who need access to funds.
Are you looking for a smart way to finance home renovations, pay for education or consolidate debts? HELOCs may be just the answer you need. A Home Equity Line of Credit gives you access to funds at a lower interest rate than traditional credit cards or personal loans, using your home’s equity as collateral. But there are many nuances to consider before applying. A Mortgage Broker can help you find the best option and explain the pros and cons of each HELOC offer.