A Home Equity Line of Credit, also referred to as a HELOC, is a type of secured credit product that includes a line of credit in addition to a closed mortgage. As your mortgage portion is paid down through your principal and interest payments, more credit becomes available on your line of credit. In other words, each mortgage payment increases the available limit of your line of credit.
A line of credit is an "open" credit product, which means you don't have to worry about any penalties if you pay off a portion of the balance or the full balance earlier or later than expected.
It can also be less expensive than a closed mortgage because you're only responsible for paying a monthly interest installment, which is often less than a mortgage payment that requires the payment of both the principal and interest. For those looking for short-term funds, for example, the lower payment may be more advantageous.
HELOCs are very convenient for people who need to have access to immediate and inexpensive funds. However, it's important to consider that, although they are convenient, there are also disadvantages to home equity lines that are not usually discussed in great detail with banking customers.
One major downfall of a line of credit is its ability to become a financial drain. Although the monthly payment is less than a closed mortgage, as discussed above, the interest rate is usually higher which could inadvertently cause a borrower to pay more money over the long run without paying down the principal balance.
Additionally, because the limit is increased as the closed mortgage portion is paid, borrowers could unintentionally reduce their available equity.
Are Closed Mortgages Cheaper Than Home Equity Lines?
A Home Equity Line of Credit can cost you more money than a closed mortgage if you don’t pay it off quickly or in a reasonable time frame. However, there are certain situations wherein a line of credit is better than a closed mortgage.
We can help you weigh out the differences between a Home Equity Line of Credit and a closed mortgage or if you already have a line of credit and want to know how to close it, please book a one-on-one consultation and we can assist you.
Contact us today to learn more.
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By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929