One of the best ways to affordably borrow money is with a home equity line of credit - also known as a HELOC. This allows you to borrow money at a low mortgage interest rate using the equity you’ve built up in your home.
For years, Canadalend.com has been helping clients get a home equity loan in Ontario for various purposes, including undertaking home improvements and repairs, combining credit card payments, and even helping to pay for kids’ tuition.
Unlike high-interest loans or credit cards, a HELOC is not only easy to apply for but also designed to help you build your savings as quickly as possible. After you’ve been approved, you can access the available credit at any time without ever having to reapply.
What is a Home Equity Line of Credit?
Home Equity Lines of Credit (HELOC) are revolving, secured credit forms. Secured loans are backed by the equity in your home, rental property, cottage, etc. If you cannot meet your financial obligations, the lender can take possession of your property.
Revolving credit allows homeowners to borrow money up to a limit but don’t need to take it out in a lump-sum payment to access it. For example, homeowners can borrow a fraction of the limit to pay for a new roof in one year and then borrow again for another home renovation the next.
The Benefit of HELOC for Homeowners
Home Equity Lines of Credit provide flexible repayment schedules at a competitive rate. Homeowners appreciate HELOCs because they allow borrowers to spend their home’s equity at any time.
Predetermined spending limits benefit homeowners through:
- Flexible Spending: Homeowners borrow based on need up to the approved limit. Its flexibility provides a superior choice if you incur ongoing expenses or projects containing varying costs.
- Lower Costs: There are lower upfront costs for a HELOC when compared to a home equity loan or credit card. This option makes accessing funds at a HELOC more affordable.
- Tax Benefits: For some, interest payments on HELOCs are tax-deductible. However, owners must use it for home improvements or eligible expenses. Please contact your accountant to determine eligibility.
- Cover Expenses: HELOCs cover emergency expenses, home renovations, consolidation of debt/bill payments, or debt management.
However, HELOCs do have limitations. A HELOC’s value and combined mortgage cannot have a worth over 80% of the home’s value. Furthermore, the home equity loan’s line of credit cannot exceed 65% of the property value.
Interest rates for a HELOC involve the lender’s prime rate and a fixed percent. For example, if the HELOC interest rates are prime plus 2%, and the lender’s prime rate is 5%, the HELOC loan rate is 7%. If you compare this interest rate to a credit card, HELOCs provide a better rate.
HELOCs provide variable rates and fluctuate because the Bank of Canada’s rate determines them. Whenever an overnight rate goes up or down, prime rates move similarly.
Some situations allow homeowners to negotiate lower HELOC interest rates. Lenders may consider it if you demonstrate a solid financial portfolio and share rate quotes from other lenders. Lenders may become more flexible in what they offer to retain your business.
Fixed-Rate Loan Versus Home Equity Line of Credit
There are subtle differences between a fixed-rate loan and a HELOC. Both choices allow homeowners to borrow against their home equity, yet they differ in their financial implications. One allows homeowners to budget a set amount each month, while the other has fluctuating interest rates, which may provide an advantage or disadvantage.
Fixed-Rate Home Equity Loan
Homeowners can lock a portion or all of an outstanding HELOC balance into a close term of one to five years at a fixed interest rate. Fixed-rate home equity loans provide security, knowing fixed payments are protected from interest rate increases. You always pay the same amount each month, making budgeting easy.
Home Equity Line of Credit (HELOC)
HELOCs operate like a credit card. Homeowners can withdraw money anytime after qualifying for a set spending limit. Repayment depends on the HELOC type, amount, and interest rate fluctuations. However, it does mean homeowners don’t have the guarantee that payment costs will not rise.
While Fixed-Rate Loan and Home Equity Line of Credit revolve around refinancing, they are structurally different. Fixed-rate loans allow homeowners to withdraw money in a lump-sum payment, repaid over an established term at fixed interest rates. HELOCs allow you to withdraw finances when you need them.
How to Qualify for a HELOC: Essential Requirements
HELOCs work by applying for a home equity line of credit. There are several requirements to qualifying for this loan type, including:
- Having at least 20% equity in the home
- Evidence of mortgage details and homeownership
- Proof of consistent income and stable employment
- Adequate credit score
- Current home appraisal
- Manageable debt level
Some homeowners may have to pass lenders' stress test when reviewing a first mortgage application. A stress test requires owners to prove they can afford payments should mortgage rates rise.
Homeowners must consider three factors before applying for a HELOC:
- Risk of Losing Your Home: Like any secured loan, you can risk undergoing foreclosure if you default on payments. Ensure you take responsibility and have a repayment plan.
- Variable Interest: HELOCs contain variable interest rates, meaning monthly payments change depending on market conditions.
- Repayment: HELOCs contain draw periods during which owners can borrow money. The repayment period follows, during which you have a time frame to repay the principal and interest. The length of repayment varies, so it is advisable to understand your HELOC's terms.
Let us Help You Secure a HELOC and Tap Into Your Home Equity
It’s not uncommon for homeowners to fall into the cycle of spending, borrowing, spending, and then falling deeper into arrears.
At Canadalend.com, we are dedicated to 5-star customer service. Get in touch with us and a lending specialist will help set up an appointment for a free personal consultation. We will help you review your mortgage options and find the solution that fits your needs!
To discuss how our home equity loans can benefit you, call us toll-free at 844-586-0710 or email us at info@canadalend.com. For our list of available locations, please visit our contact us here.