If you are a home owner and looking into the idea of taking out a home equity line of credit you should investigate how this would work for you. Going over your loan options can give you the opportunity to invest in your home. Let’s go over the key factors to a Home Equity Line of Credit.
What is a Home Equity Line of Credit?
A Home Equity Line of Credit, called a HELOC for short, is similar to a credit card. The loan has a time limit called the draw period where you can withdraw up to the maximum amount of money you need. Typically you have a draw period is between 5 - 10 years and your repayment period will be approximately 20 years.
A HELOC has less interest than a mortgage but has annual maintenance fees like some credit cards. A HELOC can only give you approximately 65% of the value of your home as a loan.
What is the Difference Between a HELOC and a Home Equity Loan?
A Home Equity Line of Credit, as reviewed above, is similar to a credit card or a second shorter mortgage. A Home Equity Loan, on the other hand, allows you to borrow a specific amount secured by the equity in your home. This is determined by your payment term, and credit history.
For a HELOC the amount borrowed is based on taking the value of your home and subtracting the remaining amount owed on your mortgage. But like a Home Equity Loan, they may take your credit history into account.
Who is the HELOC best for and why?
A HELOC can be the perfect solution, depending on your situation and how it is used. Knowing what you will be spending your HELOC on is important. The best recommendation is that you use it to put value back into your home by renovating/updating. This is because you are increasing the overall value of your home.
Another way to use your HELOC is to purchase a new home. This is a seamless workaround for those who don't have the savings they need. Often this is a result of needing to sell your original house to have the down payment. You can use some (or all, if needed) of your HELOC as your down payment and wait for your current house to sell or rent it out. Then you can pay back your HELOC when you have the cash in your pocket.
Make sure you understand the features of your HELOC to ensure you have the ability to repay the loan. This is a very important factor in deciding whether or not a HELOC is right for you. As well, you must keep in mind that you will still have to make interest payments during your draw period, so be sure to budget that into your costs.
Tax Benefits and HELOCs?
The Canada Revenue Agency states that if you borrow money for the purpose of earning income from a business or property then the interest tax is deductible. This could be used if the property you own - and are getting the HELOC for - is a place you would like to use as a rental property. The only way your HELOC’s interest is tax deductible is if you are using the property to gain income.
How to Get a HELOC?
The first thing you will want to do when starting this adventure in getting a HELOC is to talk to your preferred lender. You can take a look at the differences between lenders interest rates and features for HELOC’s. Although most people would think it would be best to take out a HELOC with the lender you have your mortgage through, that isn’t always the case. It’s better to do your research and pick a lender based on who is offering the best interest rate and features.
How Do We Pay Our HELOC Back?
This is an important question to answer when considering a HELOC. You want to be sure you can pay it back within the established repayment period. A tip here: set a budget for how much each month you will pay back that is slightly higher than the minimum payment. Talk to your lender about setting a reasonable amount to pay back each month.
If you're looking to take out a HELOC and use the loan to invest back into your current home or rental property this could be exactly the option you're looking for. Check with your preferred lender to confirm your interest rate and discover all your options. This could be the gateway to all your home dreams coming true!