Home Equity Line of Credit, also known as a HELOC, allows homeowners to borrow money against their home equity, up to the credit limit. You can borrow, pay it off and re-borrow the funds – just like a credit card.
As long as homeowners keep up with their monthly interest payments, homeowners can choose their own repayment schedule. HELOC could be an alternative to a conventional mortgage, which first requires a down payment, followed up by monthly payments plus interest.
HELOC vs. Conventional Mortgage
Two main differences between a HELOC and a conventional mortgage are the interest rate and the freedom of payments. First, a HELOC’s interest rate is variable, while a conventional mortgage rate can be fixed or variable. The interest rates of a HELOC are usually lower than that of a traditional loan, but there can be many lenders to choose from, each with their own rates. The Woollam Mortgage Team will help guide you towards the best outcome for your financial situation. The second more enticing difference between a HELOC and a conventional loan is the freedom of payment of a HELOC. You can pay as much as you want without worrying about a penalty. There are no limitations on early payments and you do not get penalized for paying off your debt early. With a conventional mortgage, there are limitations on the amount you can pay per year. If you exceed this limit, you must pay a penalty.
How to Qualify for a HELOC
- Minimum down payment or equity of 20%.
- Minimum down payment of equity of 35% if you prefer to use a standalone home equity line of credit to replace a mortgage.
- Proof of a good credit score.
- Proof of income.
- Proof that your debt relative to your income is acceptable.
- A passing grade on the government “stress test”.
Depending on how much equity you intend on taking out, your home may be subject to an appraisal to determine its market value.
Advantages of a HELOC:
- You are only charged interest if you withdraw money.
- It is very convenient to draw funds out – withdraw from a debit card or write a cheque.
- You can pay it off and re-borrow.
- Interest rates tend to be low since it is secured against your property.
Although many advantages to having a HELOC were described above, you must be careful. Your home is the underlying collateral, which means failure to repay the loan could lead to foreclosure (power of sale). Ensure everything goes off without a hitch by letting our experience as a long-time Ottawa mortgage broker help you with acquiring a HELOC, as well as making sure you don’t ever face the power of sale (foreclosure).