A Home Equity Line of Credit (HELOC, if you are someone that knows way too much about mortgages) is of great value to many mortgage shoppers who are looking for flexibility. It allows a borrower to obtain an extremely low interest rate on a line of credit by using the equity in their home as collateral. Typically, HELOC’s are priced at or near the Prime Rate.
Many borrowers find HELOC’s to be perfect debt vehicles to use when purchasing a second or third property, making investments, supplementing their cash flow (if their income relies on lump sum payments) or financing their small business. It is unlikely that a financial institution will offer a line of credit at a lower rate than their HELOC, unless you are a publicly traded company.
Benefits of a HELOC:
- Tax Deductible: If you are using the funds available on your HELOC to make investments, it is very easy to calculate the amount of interest being paid and therefore the amount of the deduction you are eligible for on your income taxes.
- Easy on your monthly Cash Flow: Since most HELOC’s are interest only, the payments are much lower than a traditional mortgage. While mortgages must have an amortization of no more than 30 years, a HELOC can be interest only without every paying down the principal owing.
- Once and Done: After you pay down your HELOC the money should still be available to you (be careful, sometimes this is not the case, see #1 in list below). Part of the allure of a good HELOC is that the borrower is able to re-borrow on the line of credit without paying to obtain a new loan facility. Even if your HELOC is one that might require approval to re borrow on it, it is unlikely that you will have to pay legal fees for future advances once the mortgage charge has been registered.
Things to look out for:
- Higher Interest Rates: In most cases a Variable Rate Mortgage is a better option than a HELOC. HELOCS are typically priced at least 1% higher than Variable Rate Mortgages, while the penalty to break a Variable Rate Mortgage is about 0.50%.
- More Underwriting or Approval: Be careful, not all HELOC’s are created equal. Some lenders like to reduce the total amount of your available credit when you pay down the HELOC so be careful. The best way to avoid this is to be upfront with your lender. Let them know that you want your HELOC fully available at all times. Although this may not seem important the key to having the HELOC is being able to use it at a moment’s notice when you really need it. There is an old saying about Banks only handing out umbrellas when the sun is shining that should be given credence when negotiating your HELOC.
- Collateral Mortgage Charge: Obtaining a HELOC typically means that your lender will be registering a mortgage charge on your property for the value of your home or more. This allows them to re-advance more credit if required. Collateral mortgages are more expensive to discharge and will certainly limit your ability to borrow anymore against your home. Like any good mortgage decision, make sure you have a good plan before your make your final decision.
If you are looking for a HELOC, enlist the advice of a great Mortgage Advisor who can offer you sound, unbiased mortgage advice and walk you through the pros and cons of taking a HELOC as they pertain to you personally.