101 Series: What Is a HELOC? Consult with a Vancouver Mortgage Broker
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Home Buying 101
What Is a HELOC?
A HELOC is an acronym for “Home Equity Line of Credit.” You could say it is a form of a second mortgage, but is different from a second mortgage which is a loan for a specific amount of money.
A HELOC also uses your home’s equity but you use it as a line of credit. It is also different from a second mortgage because you use only the amount of money that you actually require.
A Home Equity Line of Credit is something that can be conveniently used for a variety of purposes such as a home renovation project which could include re-doing your kitchen or bathroom for example. Or, you could also use A HELOC as a means to refinance your home, take care of outstanding debts or pay for your children’s college tuition.
Lending Requirements for a HELOC Approval
The majority of mortgage lenders will not consider a HELOC application unless you have a minimum equity built up in your house equivalent to around 20 % – 25%. The amount you will be able to borrow will also fluctuate from lender to lender and will also depend on the total amount of equity that you have built up.
Approval of your application will also likely be influenced by how well your credit is rated and the amount of your current outstanding debts.
Benefits of a Hone Equity Line of Credit
One of the benefits of using a HELOC is that you are not restricted by its use. A HELOC does not have to be specifically used for home improvements or renovations as you can use it for many other reasons.
Another advantage of a HELOC is that the interest rates tend to be lower than what you would pay for a personal loan and can be significantly lower than what you pay on your credit cards.
Flexibility of a HELOC
A HELOC also gives you a great deal of flexibility. You can take out the money as you need it and only the amount you actually need up to the maximum credit amount for which you were approved on your application. However, if you are taking the money in increments, there may be a time limitation involved.
A HELOC is also flexible when it comes to repaying back the line of credit you borrowed. Most lenders will allow you to make extra payments or pay the entire amount off beforehand without extra penalty, but you should confirm this beforehand as repayment methods vary from lender to lender.
Cautions about Using a HELOC
Although a HELOC has many advantages, you should use it wisely. Some lenders will only require that you pay the amount of interest owed as the minimal payment.
This might sound tempting but you could end up paying a lot more than you expected and end up paying more interest than the principal amount of the loan.
Make sure you can afford to re-pay as much as possible and are in a financially viable position so that you pay the principal down.
You should also not be tempted use a HELOC frivolously as once your application is approved than you will not be able to use the equity you have built up until your HELOC has been repaid.
If you need more information about using a HELOC than you can always give us a call as we would be happy to help you out.