What is a Home Equity Line of Credit?

A home equity line of credit (HELOC) is an interest-bearing loan, secured by real property. It's usually structured as a revolving line of credit, which means you can access the money multiple times, up to your credit limit.

Homeownership gives you two principal ways to access equity in your home, a.k.a., the difference between what your home is worth and what's owed on it. You can either take out a closed mortgage or you can set up a HELOC.

Home equity lines of credit come with variable interest rates—usually higher than what you'll pay on a mortgage loan, which is a lump sum you borrow and pay off with monthly principal and interest instalments.

In order to get a home equity line of credit at the best possible interest rate, you will need to have a strong credit score. 

Home Equity Lines of Credit Can Cover a Variety of Needs:

HELOCs can be used for home improvements, paying off debt (like student loans or credit card debt), consolidating high-interest rate debts like credit cards and car loans—or even just to access your cash immediately. Unlike a mortgage where you have to pay the monthly principal and interest payments whether you use all the money at once, home equity lines only require payment on what you use or whatever the running monthly balance is. In other words, you do not have to pay principal and interest payments, but only pay interest on the money you use. 
 
Home Equity Lines of Credit Aren't Right for Everyone:

If you're not likely to pay off your home equity loan quickly, or if you have trouble managing debt already—like making minimum payments on high-interest rate balances—this type of loan probably isn't for you. One of the biggest mistakes borrowers make is keeping large balances on their home equity line of credit for a long period of time. This equals higher interest payments and the inability to reduce the principal balance. 

It's important to remember that HELOCs are short-term financial solutions since they are 'revolving' and 'open', meaning you don't have to pay a penalty to pay them off early. And, because they are interest-only loans and are lent out at higher interest rates, it makes little sense to carry balances on them for long.

If you make minimum monthly payments on your home equity line of credit but never pay down the balance, it may be time to consolidate your HELOC into a closed mortgage product and save yourself time and money!

Mortgages Are Usually Better Than Home Equity Lines of Credit:  

A mortgage is usually a closed loan that comes with a lower interest rate when compared to home equity lines of credit. Monthly principal and interest payments help to pay down a mortgage faster since you cannot access any of the money you have paid towards your mortgage. With HELOCs, you can access the money you have already paid towards the balance since it is a revolving credit product. This can be counterproductive and keep you in debt for longer than you prefer.

Speaking to a mortgage professional like myself can help you clarify which option is better suited for your financial situation. Sometimes, you can save a fair bit of money just by closing down your HELOC product and taking out a closed mortgage loan instead. Other times, it makes sense to take out a line of credit instead of breaking your mortgage, for example.
 
Do you need mortgage help? Book an appointment today: > https://calendly.com/sarahcoluccimortgage.


Sarah A. Colucci, Senior Mortgage Agent
Mortgage Edge, Broker 10680/Direct: 647-773-4849
www.coluccimortgages.com
 

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