Six Uses For a Home Equity Line of Credit

May 21, 2010 | News | admin | 0 Comment

A Home Equity Line of Credit Might be For You

A home equity line of credit (HELOC) provides a level of flexibility that is not available from your traditional fixed or variable mortgage. A home equity line of credit allows you to customize your mortgage payments and pay as little as interest only making this an ideal product for anyone looking to keep their payments as low as possible.

How Does a Home Equity Line of Credit work?

Like a traditional mortgage, a HELOC is registered against your property. This provides the lender with greater security resulting in you receiving a lower interest rate. Interest rates for most HELOCs are around prime plus 1% (3.25%). Compare this to an unsecured line of credit around 7% or many credit cards which are around 18%. Your interest savings can be substantial. Your HELOC gives you access to the equity in your home (up to 80% of the value of the home) to use for emergencies, large purchases, renovations, vacations….etc. You can have your entire mortgage as a line of credit or you can add a line of credit to an existing mortgage if you wish.

How Can I Use My Line of Credit?

Home renovations – Use the equity in your home to fund your upcoming renovations or emergency home repairs
Child’s education – Your home provides a cheap source of funding for your child’s education. You can even give your child access to a portion of the line of credit in case of emergencies while they are away at school.
Self employed – Is your business cyclical or is your income unpredictable? A home equity line of credit provides you with access to funds at a reasonable interest rate to help float your business through the slow times.
Investing – Certain home equity lines of credit can be used for investing purposes and making your mortgage tax deductible with programs such as the Smith Maneuver
Buying a second property – Would you like to purchase a second property such as a cottage or an investment property but don’t have the downpayment? Would you like to buy a property in a different country, but are not familiar with their mortgage market? A home equity line of credit can provide you the funds necessary to make your next purchase.
Debt consolidation – Why not consolidate all your high interest credit card and non-secured debt into one low line of credit secured against your home. You will pay less interest and pay off your debt quicker.

As you can see a home equity line of credit can be an effective tool to keep your carrying costs low on larger purchases as well as giving you easy access to cash in case of emergencies…..but it must be used responsibly. That being said using a HELOC irresponsibly can be a recipe for disaster. After all, it gives you access to the majority of the equity in your home and allows you to make interest only payments which would result in you never paying down any of the principal if you choose.

If you have any questions about Home Equity Lines of Credit or would like to discuss your situation to see if this product might be right for you, please do not hesitate to contact me.

Some examples of a HELOC from Canadian Banks